The bailout may finally be getting up close and personal. As many as three million struggling homeowners could be in line to get some help from the U.S. government, under a plan put together by the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department.
The plan, said to be in the final approval process by the White House Office of Management and Budget, reportedly calls for the feds to spent $40 billion to $50 billion to share lenders' losses in putting together new mortgage packages for homeowners who are on the brink of default. It would most likely be funded through the $700 billion rescue program already authorized by Congress.
FDIC Chairman Sheila Bair has been pressing for a plan that would help taxpayers stay in their homes as a way of attacking the foreclosure problem. The plan is a response to her demand for a framework for systematically modifying troubled loans, which generally fall into two categories -- adjustable rate mortgages (ARMs) that include stiff escalator clauses and loans that exceed the market value of the homeowner's property.
Designing a one-size-fits-all program isn't easy, since policymakers are essentially dealing with a moving target. With property values still sluggish in most of the country, home values may not yet have hit bottom, so that homeowners who are barely afloat may soon find themselves "underwater," meaning they owe more on their home than it is worth.
That's not always a crisis but if a homeowner becomes ill, loses his or her job or suffers other financial setbacks, what is essentially a paper loss can quickly become a crisis when the homeowner who is suddenly unable to keep up with mortage payments discovers that his home can't be sold because the market is poor and the loan amount exceeds the likely sale price of the home.
Moody's Economy, a research firm, estimates that as many as 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes.
What to do
Of course, none of the inside-the-Beltway maneuvering is immediately helpful to homeowners who are in trouble right now. What can a homeowner in trouble do today to stave off foreclosure? There's no single answer that works in every situation, but here are some essentials to consider:
1. Avoid scams The very same con artists who got us into this mess are working to keep us there. Many are now presenting themselves as "foreclosure rescue" specialists. For a fee, they'll supposedly help you renegotiate your mortgage, lower your payments, stay in your home, get money back and maybe win a free trip to Las Vegas in the bargain. Sound too good to be true? Uh-huh.
Tracye of Denver was in the midst of a foreclosure when she received a mailer from a company called Brazian Equity Group.
"I was under the impression that I had a loan with the land contract, an interest-only loan and the funds were placed in a escrow account for the monies to be paid monthy. I did sign my house over with the agreement that I would remain on the title and that I would be co-owner," she told ConsumerAffairs.com.
But when Tracye went to the Denver City and County Building, she found that she was no longer listed on the deed to her home. "There is something in the contracts stating that I had to pay monthly but only skim through the contract at the closing not really understanding it," she said. Her case is now in court.
The tip-off that you're being scammed, Illinois Attorney General Lisa Madigan says, is when the company offering the "rescue" requires an upfront fee.
"While consumers are doing all that they can to save their homes from foreclosure, it is unconscionable that con artists would prey on their vulnerabilities with these so-called 'rescue' schemes," Madigan said.
2. Talk to your lender Lenders supposedly are eager to work with troubled homeowners. An industry group called HOPE NOW has issued guidelines that are supposed to ensure that homeowners quickly receive the help they need and that the assistance process is respectful, understandable, and transparent. The agreement also includes guidance for dealing with second mortgages and short sales. Unfortunately, many consumers report that their lenders are uncooperative or simply unresponsive.
"Anytime we have ever tried to call American Home Mortgage, they never get back to us. They completely ignore us," said Joseph of Warwick, R.I., who got into trouble when he became disabled after a car accident. "A man showed up at our house today and told me that he was there to take pictures of the property and asked if I knew that this property had been foreclosed on," he said in a recent complaint to ConsumerAffairs.com.
"I just don't understand the fact that they would rather take my house back and make no money than work it out with me and get their money. Are they on a mission to ruin people's lives?" he asked. .
3. Be demanding If your lender doesn't respond, some consumer advocates suggest you withhold your payments, making you a delinquent customer and moving you up the queue as someone who needs more help and attention. There's an obvious downside to this tactic: it will hurt your credit score and it could start a foreclosure spiral that you'll be unable to control.
3. Be skeptical and flexible HOPE NOW may be helpful but homeowners should also examine other options while considering whatever deal their lender may (or may not) offer. As David Petrovich, the head of a New Jersey non-profit notes, HOPE NOW plans require homeowners to waive their right to sue, thus shutting off the option of going to court if things go sour. Petrovich says that, HOPE NOW rules notwithstanding, lenders put their financial interests first and may not present all the options to homeowners.
4. Get legal help Many of today's troubled loans were put together with the fiscal equivalent of super glue. Essential steps were skipped, inaccuracies slipped through and outright fraud my be evident to a trained eye. It may be worthwhile to have an attorney pore over your mortgage to see whether your mortgage lender is violating any terms. If so, you can threaten to sue, which may get you a rapid response. Have your lawyer contact the lender; legal threats from laypeople usually go nowhere.
If you cannot afford a lawyer, Legal Aid (Google "Legal Aid" in your city or state), ACORN or similar organizations may be able to help you. (Forget the campaign trail blather about ACORN. It's what it says it is -- a consumer group that fights for low-income Americans).
5. Call your insurer Most homeowners never think of getting their mortgage insurer involved in lending workouts but your insurer has a vested interest in your ability to pay off your mortgage and theyre likely to use their pull to work something out with your mortgage company. If you made a down payment of 20% or less, you probably have mortgage insurance. The premium is deducted as part of your monthly escrow, possibly under the heading "PMI."
A strong advocate
FDIC Chief Sheila Bair
FDIC's Bair has emerged as the Bush Administration's strongest advocate for helping homeowners avoid foreclosure.
While Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have implemented plans to pump billions of dollars into the nation's banking system, Bair has been virtually alone among administration officials in making the case for addressing the nation's credit crisis at its source preventing more mortgages from going bad.
"We are behind the curve," Bair told the Senate Banking Committee in recent testimony. "We are falling behind. There has been some progress, but it's not been enough, and we need to act and we need to act quickly and we need to act dramatically."
The plan now said to be in its final approval stages would try to establish a standardized manner in which loans are modified. Part of the problem thus far has been the manner in which these loans have been broken up and securitized. With a number of different entities owning a portion of each mortgage, it has been difficult to get agreement on altering the terms of the loans.
Realtors have complained that lenders have been uncooperative at times when "short sales" have been proposed as a way to sell a home before it goes into foreclosure. The reluctance, say many experts, is really the inability to get an agreement from all the parties.
Under the plan reportedly being drafted in Washington, the federal government would guarantee loans that were modified to help homeowners. If the homeowner was still unable to make payments and defaulted on the modified mortgage, the U.S. government would absorb at least a portion of the loss.
Despite efforts to provide homeowner relief, foreclosures continue to rise at a rapid rate in 2008. Though new foreclosures dipped in September because of moratoriums in a number of states, they were up 71 percent in the third quarter over the same period a year ago.