Is the foreclosure prevention program really working?
Owing to the subprime mortgage crisis, the mortgage market in United States fell like a pack of cards. The Make Affordable Plan was such that it failed to address problems of homeowners with second mortgages. The Making Home Affordable Plan was greatly criticized as more and more homeowners lost their homes to foreclosure and were left shelter less. In response to the homeowners’ plight, the President introduced another program known as Foreclosure Prevention Plan.
- What are salient features of the new program?
A homeowner qualifying for the Foreclosure prevention plan can enjoy lower interest rates and consequently lower monthly payments. The plan ensures that the interest rate on second mortgages can drop to 1% for a period of 5 years. The earlier program failed to attend to the problems of the homeowners having second mortgages. This program however overcomes the lacuna.
- How will this program be funded?
The foreclosure prevention plan will receive USD$50 billion. This cash was assigned from the Treasury Department’s USD$700 billion bailout fund that was established by the Congress a year ago.
- How much will lenders and borrowers receive as incentives?
The program aims at extending cash incentives to borrowers as well as lenders for modifying terms of second mortgages. The foreclosure prevention plan would extend USD$500 as upfront to a lender. Lenders would also receive USD$250 for a span of 3 years till the time the payments are kept updated or current.
The borrowers have been offered incentives too. A borrower will receive USD$250 for staying current on their mortgage payments. They will continue receiving this cash incentive for a span of 5 years.
- Is this program addressing “underwater” homeowners?
The Treasury Department is trying to revive the Hope for Homeowners program that was launched earlier. The program enables homeowners to refinance their existing mortgages so that they can enjoy favorable rates. However, there was a snag on part of the lenders. The fact that the program required lenders to cut down principal balance of the homeowners stalled the program. So far a single homeowner has benefited from this program. However, the government has made certain changes in the earlier program making it more attractive for lenders.
Henceforth, lenders will receive USD$2500 for refinancing mortgages under the Hope for Homeowners program. And lenders will continue to receive USD$1000 for 3 years till the time a borrower stays current on his mortgage payments. This program is expected to help homeowners build equity in their property.
Quoting a Treasury statement “Underwater borrowers are more likely to be at risk of foreclosure, so increasing equity for these homeowners through Hope for Homeowners will be an important tool for the Administration.
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