This morning I found an article relating to President Obama’s Foreclosure Prevention Plan, of which I have mixed feelings. While I agree that banks should adjust interest rates to a fixed rate from an adjustable rate (aka ARM loan), and that they should lower the interest rate a couple of points if that will help the homeowner stay in their home, I do not agree that the principle balance should be lowered, since homeowners who did not finance more than they could afford still have the same principle balance on their loans. No matter my feelings, the plan is still moving ahead!
So, today’s article is No bankruptcy help for homeowners
Brief summary: The bill to modify delinquent (foreclosure) loans in bankruptcy court was voted down (51-45) in the senate this week, however, the Foreclosure Prevention Program still allows banks to modify homeowner mortgage payments to 31% of their pre tax income.
So, housing advocates say that the bill would have put pressure on loan servicers to modify loans before borrowers file for bankruptcy, and that is the key phrase here. The part that was voted down is only the part that allows judges to modify loans when people are in bankruptcy. The banks and loan servicers covering 75% of all of the mortgages across the country are already participating in this loan modification program, so they are lowering monthly payments to 31% of pre-tax income for those people who can’t make their mortgage payments.
The bill that was voted down, on bankruptcy reform, was a key part of President Obama’s foreclosure prevention plan. The plan includes a lot of incentives for banks and loan servicers to modify loans including incentive payments. One of the program’s incentives is that these loan servicers get $1,000 for each loan they modify, and even more if the borrower doesn’t redefault. That is a lot of encouragement right there!
Overall, I don’t know how I feel about this plan. I am happy that banks are lowering interest rates and and changing the type of loan (ARM to fixed rate or 15 year mortgage to 30 year mortgage) to help people stay in their homes. If the adjustment of payment rates to 31% pre tax means that the loan principle amount is not changing, (i.e., that a $200,000, 30 year loan at a fixed 7% is still a $200,000 loan, but that payment went from $1330 to $1100 because they adjusted the length of term from 30 years to 40 years and the interest rate from 7% fixed to 6% fixed), then I am completely happy for the banks to step in and help. However, that is where I draw the line. People should not be “told” that if they take on more than they can afford in the future, the government will step in and fix it for them. They need to learn personal responsibility.
