The government might bail out all of the homeowners that are in trouble. How will they know which ones to help? How will they keep owners that are upside down on their homes from trying to get the government aid by actually going into foreclosure. I have been very close to this problem in CA. Homeowners will call their lenders and ask to do a short sale. The banks respond by saying that they will not even consider a short sale until the mortgage is late. What they are doing is creating more foreclosures. The same will go for this government sponsored program. If people find out that they can cut their payments in half what is keeping them from going into foreclosure just to get help. I see a slipper slope here.
Government Said to Be Discussing Plan to Aid Homeowners – NYTimes.comSenior Bush administration officials are discussing a plan that could help up to three million homeowners struggling to pay their mortgages to stay in their homes, three people briefed on the proposal said Wednesday.
The initiative could be the most sweeping government effort directed at mortgage borrowers since the financial crisis began last year. Under the plan, the government would agree to shoulder half of the losses on home loans if mortgage companies agreed to lower borrowers’ monthly payments for at least five years, according to the people briefed on the plan who asked not to be named because details were still being negotiated.
Officials from the Treasury Department and the Federal Deposit Insurance Corporation are working on the proposal and an announcement may come soon. Sheila C. Bair, the chairwoman of the F.D.I.C., has been the leading proponent of the plan and first discussed the idea publicly a week ago.
The plan could cost $40 billion to $50 billion and would be part of the $700 billion financial bailout package that Congress approved earlier this month. The money would go toward covering future losses on loans that are modified according to standards established by the government.
The program is intended to entice more mortgage servicing companies that handle billings and collections to reduce payments for homeowners by lowering interest rates, writing down loan balances or changing other loan terms.
So far, many companies have been reluctant to aggressively reduce payments because they are afraid that borrowers might default again or that investors in mortgage securities might file suit.
By offering to shoulder half of any future losses, the government hopes to stabilize the housing market. At the end of June, nearly one in 10 mortgages was delinquent or in foreclosure.
But the effort could prove to be expensive, especially if the economic slump is more prolonged and deeper than many are expecting. For instance, if $500 billion in loans are modified under the program, 25 percent of them redefault and losses on those loans total 45 percent, the government would spend $28.1 billion (half of $56.3 billion). If redefaults are 40 percent and losses 55 percent, the government would spend $55 billion.
A spokeswoman for the Treasury Department, Jennifer Zuccarelli, said it would be premature to discuss a plan that policy makers were still working on.
“As we said last week, the administration is going through the White House policy process too look at ways to reduce foreclosures, and that process is ongoing,” she said. “We have not decided on a particular approach.”