Which Foreclosure Scheme Is Fair to All Parties?

Treasury Secretary Henry Paulson believed that saving the financial industry was more important than helping troubled homeowners avoid foreclosures so he spent the first $350 billion of the $700 billion bailout fund saving major financial institutions.

In contrast, President-elect Barack Obama and his Democratic Party believe that helping homeowners directly to stop further foreclosures is essential in reversing the financial crisis.

There had been a total of 1.2 million foreclosures from January to June 2008, a difference of just 0.3 million compared to the total of 1.5 million foreclosed properties for the entire year of 2007. Some analysts predict that foreclosures would reach three million in 2009 due to the continued decline of the economy. Rising unemployment, sinking home prices and rising monthly payments due to the use of adjustable-rate mortgages are factors that lead to nowhere but more foreclosures.

While some economists and financial analysts oppose the rescue of homeowners with foreclosed properties, such as Kent Smetters of Wharton, several professors and finance experts believe that rescuing homeowners and preventing further foreclosures are crucial to reversing the economic downturn, such as Wharton professors Jack M. Guttentag and Susan M. Wachter.

Another is Federal Deposit Insurance Corp. Chairman Sheila C. Bair who has been advocating for the direct rescue of troubled homeowners in order to reduce the number of foreclosures. She said foreclosure prevention is an essential move in stabilizing the financial market. She cited the success of the FDIC loan modification model used to help distressed homeowners at IndyMac Bank, preventing the foreclosure of more than 40,000 homes.

The key feature of Bair’s loan modification model is the reduction of monthly payments to about one-third of the mortgage borrower’s income. This is achieved by reducing the interest rate, extending the loan term or reducing the principal balance. Bair said that mortgage banks can be persuaded to offer loan modifications if the bailout program guarantees to share in further losses arising from the modifications.

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• Banking Committee Chair Dodd Considers Bill to Help Homeowners Avoid Foreclosure
• Moratorium on Foreclosures Lobbied by California Activists
• Repo Homes Will Rise Next Year despite Eight-Percent Drop
• Use TARP to Stop Foreclosures, Bair Says