1. Income documentation. Many of the plans, to prevent speculators or liars from cashing in on public welfare for foreclosure victims, require borrowers to verify they have enough income to make reasonable monthly payments. With over half of subprime borrowers expected to have overstated their earnings in order to qualify for higher loan amounts, documenting their real income will instantly disqualify them from any government programs. Both FHASecure and the new Freddie/Fannie bailout package require borrowers to verify their income, which is why foreclosure of liar's loans and those purchased by speculators are still driving the housing market crisis.
2. Minimum equity requirements. FHASecure and the latest bailout of the Government Sponsored Enterprises require that homeowners have at least three percent equity in their properties in order to refinance to a government guaranteed loan. Either the lenders will have to write down the loan to a lesser amount, or the owners need to make a down payment. The problem is that mortgage companies do not want to take such a large loss on a house when it is just as easy to go through with the foreclosure and attempt to sell on the open market.
3. Second and investment homes excluded. Another problem with many of the government programs is that they are designed only to help with a primary home. Rental or vacation homes are disqualified from any public funds. While this may be a good idea to keep speculators' hands out of the public cookie jar, it shows a failure to realize that rampant speculation drove the housing bubble -- leaving them on their own to suffer now necessarily means that prices will come down and homes losing money for investors will be abandoned.
4. More expensive solution offered by banks. With Project Lifeline and the Hope Now Alliance, lenders were recommended to offer homeowners in trouble a mortgage modification or repayment plan in order to get back on track. Unfortunately for foreclosure rates and borrowers, most banks simply offer a payment plan, doing nothing to modify the terms of the loan to be more affordable. Few homeowners struggling with their current payment are able to pay even more per month to repay the arrears, which is the biggest reason these programs have been utter failures.
5. The problem of second mortgages. For home equity line of credit and second mortgage holders, the options offered by the government amount to one solution: write it off. Understandably, few mortgage companies are willing to do this; although they know there is little chance they will get anything from a sheriff sale, the chances are higher than with simply giving up on the loans. The newest bailout package for Fannie and Freddie is not available to homeowners who can not shake off their second mortgages; while subprime loans, which are foreclosing at the highest rate, were typically made with automatic second mortgages at the time of purchase (80/20 loans).
6. All programs are voluntary. But by far, the biggest problem with all of the programs offered to date by the government is that they are 100% voluntary for lenders to participate in. If the mortgage company believes it will make more money in the end by foreclosing, there is nothing to force it to help homeowners stop foreclosure through any program. In fact, with the Federal Reserve coming to the rescue of the banking system over and over again with hundreds of billions of dollars of free money and loans, it may be in the best economic interests for lenders to let homeowners fail in droves, crying that the banks are the victims of predatory borrowers and lining up for more corporate welfare than homeowners could ever dream of receiving.
Although it is quite noble for neighbors and family members to wish to help out homeowners in distress, requesting government to step in and fix the foreclosure crisis will only produce more failed programs and more empty houses. For an organization that claims on monopoly on the use of force, the federal government has been tellingly reluctant to force banks to assist borrowers when the loans that have driven the economy off the cliff were clearly, for the most part, predatory mortgages. For bureaucrats who have no problem telling foreign countries how to live, manipulating interest rates in the American economy, and spying on every person in the country, they seem not to want to turn their power on the large financial interests. But is that an indication of where the real power lies?
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