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Home Foreclosures Can Be Avoided…How?

By sharon | December 15, 2008

The program that could change the tide of nationwide home foreclosures is yet to be made. Modifying troubled mortgages may not be the solution we are looking for to reduce foreclosure homes.

There is a serious problem when it comes to the government’s plan to change delinquent mortgages and eliminate foreclosures since it would not work for the two trillion of mortgages kept in mortgage-backed securities. They are what you may call, the so-called underwater mortgages that are vulnerable to default and compose the largest menace to the banks that controls them, to home prices and to the economy.

What the government could do with underwater mortgages is to give those homeowners new mortgages and would have interest-only loans with a 3% interest for ten years, written to an 85% of the existing mortgages. This type of new mortgages would also satisfy the old ones and would not also book a loss since they have already marked that would-be-foreclosure down.

This does not mean that the government is going to spend tax money for foreclosed homes since they are just going to lend homeowners with a probability of repayment. If this is done and foreclosures of underwater mortgages are prevented, the chances of having a more stabilize home prices can emerge, purchase mortgages may become more accessible and house sales would emerge.

Since house sales are the largest instrument in consumer spending and goes up to 70% in national economy. The change in lending and borrowing could dramatically change outcome since this is a good bailout.

Because there is big risk nowadays with lending in banks seeing financial institutions fall because they were also vulnerable to mortgage-backed securities, the result of this is that banks will no longer borrow from each other up to the time that they see a bottom to the prices of those securities.

The only solution that could be seen is to make new mortgages to pay off foreclosed underwater ones to set-up that bottom for mortgage-backed assets and the economy.

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