The idea that responsible taxpayers might be called upon to bail out irresponsible ones seems to underlie much objection to the Homeowner Stability Initiative, with additional criticism directed at its feasibility. The National Review contends that up to 50% of homeowners who already participated in mortgage reductions have defaulted again, noting that a primary reason for the housing crisis was falsified mortgage applications and rampant home-buying speculation. The Wall St. Journal agrees about falsified applications, saying the mortgage relief plan will reward fraud, due to the lack of investigation into the legitimacy of the original loan documents, despite the President’s assertions to the contrary.
Beyond fraud, some Americans believe that homeowners will deliberately go into foreclosure to take advantage of programs that can lower their monthly payments or interest rates.
If the purpose of the Homeowner Stability Initiative is to assist desperate homeowners and not prop up bank balance sheets, the government might have looked to homeowners for common sense advice on mortgage broker relief that would help them instead of consulting with bankers and mortgage industry profiteers desperate to recoup their losses.
What reasonable steps could the government take to assist homeowners at risk of default?
Don’t Wait for Defaults to Help Homeowners
If a homeowner falls behind one or two payments but has ongoing income and can make ongoing payments, though has no means to catch up with the arrearage, it’s common sense to help that homeowner before he defaults. With Federal money on the table, banks are likely to advise homeowners who are falling behind to go into default because that is the only way the banks can (will) help them. Bad policy. Common sense mortgage relief means addressing the problem before it spirals out of control and causes foreclosure.
Ban Serial Mortgage Late Fees
Once a homeowner falls behind a payment or more, banks credit each subsequent payment to the prior month, leading to serial late fees which add up quickly. If a homeowner missed November’s payment but has made timely payments since then, common sense tells us he should not be faced with several hundred dollars in late fees reflecting 4 months of “late” payments.
Defer Missed Payments
When a homeowner falls behind on a mortgage due to extraordinary expenses, he may be able to keep current on his mortgage in the future if the arrearage is resolved. Deferring missed payments by tacking them on to the end of the mortgage term without penalty may be just the common sense mortgage relief an honest but faltering homeowner needs. Many banks already have programs to do this, but expanding them and liberalizing their terms could help many more homeowners at risk of default.
Encourage Partial Payments
Default is often not an all or nothing proposition. But try to get a bank to accept a partial mortgage payment, and it may seem like one. When a homeowner has income but cannot meet the entire mortgage payment, allowing the loan to be considered current if the homeowner maintains regular partial payments in an agreed amount, while deferring the difference without penalty, maintains the integrity of the mortgage while offering common sense mortgage relief to the financially compromised homeowner.
Enact a National Usury Law; Limit Mortgage Lender Relief to Banks Which Apply it to Future Payments on Existing Mortgages
Banks and mortgage lenders charging excessive rates of interest was a prime cause of the housing bubble’s burst. Unless banks and mortgage lenders are restricted by law from “doing it again,” rest assured, they will, as soon as the economy brightens enough to present them with the opportunity. Want to help homeowners who signed mortgage notes at unconscionable rates before this new law takes effect? Make voluntary adjustments to the mortgage notes for future payments on existing loans by banks and mortgage lenders a precondition to participating in any Federal funded bailout program.
Enact Legislation Requiring Mortgage Notes and Deeds to Be Filed With Initial Foreclosure Complaints
While foreclosures are at a record high in this country, up to 40% of them cannot be legally maintained. An Associated Press report this week stated that in up to 40% of foreclosure cases, the party initiating the foreclosure cannot produce the mortgage note. With sloppy banking practices leading to record foreclosures and sometimes foreclosures initiated by parties which may not have the right to file them, one common sense way to reduce mortgage foreclosures is to require filing of the note and deed with the initial action.
It’s common sense.