Bankruptcy & Foreclosures

When the economy reaches levels where the light at the end of the housing crisis tunnel begins to fade, what choice to mortgage holders have but to turn to their government for help? As it turns out, Congress is ready, willing, and able to help more than a million homeowners staring down the barrel of potential foreclosure. The only problem is that their latest proposal is being met with skepticism in that it could worsen the current situation rather than improve upon it.

The plan calls for up to a whopping $300 billion in loan guarantees from the Federal Housing Administration to refinance loans that homeowners can’t afford under the stipulation that the original lender reduces the principal on the loan to 85% of the home’s current market value.

These measures aim to counteract the recent trend of home-price declines and it does have some redeeming qualities namely in the fact that lenders would get back more of their money than they would by foreclosing. Additionally in preventing 1.5 million foreclosures, this tactic would halt (or at least slow) home-price declines since it would keep these 1.5 million properties from flooding an already saturated market.

So what’s the problem you ask? Some critics claim that this plan would essentially transfer the risk to homeowners (mortgage holders) and lending institutions that were in fact cautious during the housing boom. Even more concrete is the reality that FHA would be left holding a massive portfolio of loans backed by houses and property worth less than the balances on the mortgages. You may say so what to these risks but think about it for a moment: Rather than banks and individuals facing foreclosure risk, the government itself (meaning each of us, the taxpayers) would be responsible for some 300 billion dollars in bad paper; This coming at a time when FHA’s losses are already at record highs.

The bottom line is that there is no easy solution to the crisis Americans currently face and regardless of how the numbers are shuffled; the burden of mortgages worth more than the property behind them isn’t going to simply go away. The Dodd-Frank bill is one of many yet to be approved proposals attempting to lessen the economical impact to the individuals in trouble with their mortgage but the fact remains that displacing the debt doesn’t make it go away.