Tuesday, September 4, 2007

Foreclosure bail-out

You may recall a few posts ago when I wrote that the government and the banks need to get together to solve this foreclosure problem.

The government listened. I love it when the government listens to me!


The government is working out a deal that will help subprime lenders refinance. These are homeowners that have mortgages that are going to adjust -- the rate will rise from, say, 6% to, maybe, 8% or 10% and really crank up the monthly payment.

But, of course, there is a hitch. I think the program will only be available to homeowners that are current with their payments. I must say that most people don't really realize they are in trouble until they have missed a payment or two. I don't think that a lot of people will go and search out this program before they are in trouble. Keep in mind -- these are people with bad credit and probably don't understand a lot about how the financial world works. Not to mention whenever most of us are in financial trouble we hit the denial stage first. When you're in denial, you're not looking for a bail-out program.

I read a really nice article that McClatchy put out on this topic.
The article says this program will help, at most, 21% of the subprime borrowers that will need help. The article estimates about 480,000 homeowners could be helped by the program, but 2.2 million homeowners will be affected by the subprime meltdown.

Read that again: 2.2 million homeowners affected.

Here's the article:
http://www.startribune.com/535/story/1395756.html

While I think this is a good start, I also think it is a case of good intentions by the government that won't seriously help.

I think the psychology of the homeowners affected -- people with bad credit, people that probably don't have a good understanding about how credit and loans work, people that have been burned by loans before -- these are not people that tend to be organized and proactive in their financial lives. They're not people with financial advisors, or even good family role models.

If the program excludes anyone that has missed a payment -- that's too bad. I think many homeowners will be in denial about the problems they face until they start missing payments.

I would like to see the government work directly with the lenders to refinance the mortgages. Have the lenders and the government work out a deal to OFFER the homeowners a refinance option BEFORE the mortgage adjusts. But -- I really don't think that will happen.

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