Congress has been readying two foreclosure prevention bills to be presented to Barack Obama during his first working days as president in January.
One of the bills would allocate at least $40 billion from the second half of the $370 billion Troubled Asset Relief Program fund to directly help homeowners in danger of foreclosure. The other bill would authorize bankruptcy judges to order loan modifications for the primary mortgages of homeowners in bankruptcy.
Many of the country’s economists say that continued foreclosures would perpetuate the cycle of bank losses, housing market decline, business losses, unemployment and foreclosure. According to Moody’s economists, over seven million homeowners would default on their mortgage loans by 2010 if nothing is done to help troubled homeowners. As of the first week of January, about 2.5 million mortgage borrowers are already in foreclosure and nearly ten percent of all Americans with home loans are delayed in their monthly payments.
The modification plan being readied by Congress is based on the model used by Federal Deposit Insurance Corp. Chairwoman Sheila Bair to help IndyMac Federal Bank borrowers. Under the plan, monthly payments would be lowered to about one-third of a borrower’s gross monthly earnings. Mortgage lenders would be advised to extend loan terms to up to forty years and to reduce interest rates temporarily to as low as three percent for five years.
Congress has chosen the FDIC model because none of the 7,500 IndyMac mortgage borrowers who availed of Bair’s loan modification plan have gone back into default or become in danger of foreclosure.
The other congressional bill, which empowers bankruptcy judges to rewrite mortgage loans, has been opposed by bankers because it would force them to impose higher interest rates. But it has received support from Citigroup, which holds seven percent of the country’s mortgage loans.
These two bills, if fully supported by Democrats and approved by Congress, could help Obama fulfill his campaign promise of prioritizing the rescue of homeowners troubled by foreclosure.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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