Sunday, December 7, 2008

Is it Foolish to Continue Paying Your Mortgage on Time?

by Nancy Osborne, COO of ERATE


The government recently announced yet another new bailout program however this 1 has the unusual twist of assisting individual homeowners rather than banks, corporations or Wall Street. The program is aimed directly at distressed borrowers who have little to zero equity remaining in their homes with a pre-condition that they must be a minimum of 90 days delinquent on their mortgage payment to qualify for the program and they must have an outstanding mortgage balance equal to 90%+ of the value of their property. The program, called the Streamlined Modification Program, is being supported by FHFA, the Federal Housing Finance Agency which is the newest overseer of GSEs Fannie Mae and Freddie Mac. Eligible delinquent borrowers are being promised a quick and streamlined process in reducing their mortgage payments to revised affordable levels in an effort to keep them out of foreclosure. The pre-requisite of mortgage delinquency to participate in the program, has some concerned that this is tantamount to encouraging homeowners to deliberately stop making their mortgage payment in order to become eligible under the terms of the program. The government has set up some parameters which may help prevent this outcome, namely that participating borrowers must legally certify that they have experienced an authentic (vs. fraudulent) financial hardship and that they did not in fact intentionally default on their mortgage payment in order to become eligible for the loan modification they are currently seeking. The program would cap an eligible borrower's mortgage payment, along with their total monthly expenses, at 38% of gross monthly household income. However if a homeowner is not able to qualify under the 38% loan modification parameters, they may still be able to negotiate on an individual basis for their own unique loan modification terms. The loan servicers involved in the process would also receive $800 from the government for every troubled borrower they are able to initiate into the program.

Whether or not this program will stop the hemorrhaging or compound the problem by piling on still more bad debt and encouraging homeowners to deliberately decrease their earnings, remains to be seen. But one fact seems indisputable at this point and that is that the real victims of this complex financial calamity are the millions of homeowners who are honest, hard working, played by the rules, knew their own financial limitations and kept to them by not over-extending themselves. The real tragedy of this mess is that the honest borrowers are the ones being hurt most of all, who is stepping up to bail them out?

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