The Effect of the $700 Billion Bailout on Homeowners Facing Foreclosure

Servicers have been under pressure to modify loans since the mortgage meltdown began a year ago. However, they say the biggest roadblock to changing loan terms are the investors who hold the securities created from those mortgages.

"It's really not the servicers' decision," said John Harding, real estate finance professor at the University Of Connecticut School Of Business.

However, the $700-billion rescue package for the financial system includes measures designed to stem the rising tide of foreclosures. Steven Adamske, spokesman for the House Financial Services Committee, believes that the government -- by becoming an investor in mortgage-backed securities -- will have new clout to demand that loan servicers modify mortgages. "If servicers are an impediment [to loan workouts] we can take another look at the industry next year and see if there are other actions we can take to remove roadblocks," he said.

Government Foreclosure Prevention Programs
The government has three foreclosure prevention programs, FHASecure (part of the economic stimulus package signed earlier this year, which is due to expire on 12/31/08), Hope Now (a voluntary joint effort by lenders, mortgage servicers and nonprofit housing groups to help troubled homeowners renegotiate their mortgages) and the new HOPE for Homeowners (part of the Housing and Economic Recovery Act of 2008, signed into law on 7/30/08).

Hope for Homeowners began this month, targeting those unable to pay their mortgages. It is for homeowners who bought their homes before 2008 and now have monthly payments exceeding 31% of their income. Under the program, lenders are asked to voluntarily write down mortgages to 90% of a home's current value. Junior lien holders (e.g., 2nd mortgages, etc.) are asked to write off their liens entirely. The new 30-year fixed-rate loan would be insured by the Federal Housing Administration and could not exceed $550,440.

How much will the bailout help homeowners?
"It's impossible to know whether it will help anybody but the banks stay open another week," said Mark Dotzour, chief economist at the Real Estate Center at Texas A&M University . "Until we see a plan to get people to buy those empty homes, we're just going to go from one band-aid to the next."

As the owner of a large number of mortgage securities, the federal government would have the power to modify more troubled loans, said Treasury officials. The government may also buy the mortgage loans themselves from banks, which it can then adjust more easily.

The government would try to avoid "preventable foreclosures" in a way that "makes sense for taxpayers," the officials said on a press call.

"We will have a lot of influence," they added.

Unlike a private investor or lender, "the government is here to help. We want to rebuild neighborhoods from the ground up," Adamske said. But Paul Leonard, California director of the Center for Responsible Lending, a nonprofit advocacy group, thinks the measure really won't help many homeowners. He believes the only way to ensure people stay in their homes is to allow bankruptcy judges to modify or forgive loan terms in bankruptcy cases, which he said could have prevented 600,000 foreclosures.

Still, even if some homeowners are helped, it's not going to quickly put the American economy back on its feet, said Shaun Bond, associate professor of real estate at University of Cincinnati 's business school.

"The adjustment in the housing market will still be a long, drawn-out process," Bond said. "It will be several years before we see a return to normal conditions."

Who to Contact for Assistance
Consumer advocates say you should first contact your lender to see whether you can adjust the terms to make the payments more affordable. Call the Hope Now hotline at (888) 995-HOPE. Get information on the new federal loan restructuring program is at www.hud.gov . You can also fill out the free loan quote form on this site, and we'll help you determine your best options for foreclosure prevention.