The Housing and Economic Recovery Act's Hope for Homeowners program and the Hope Now initiatives have to stem the foreclosure tide. Hope Now, a government-backed alliance of mortgage lenders has reportedly led to the modification of 2.2 million mortgages in 2008, but about half of these loans slipped back into delinquency in the first three months of the year. The main reason for this is lenders' refusal to reduce principal amounts or interest rates.
In the case of the Hope for Homeowners program, which was supposed to address deficiencies of Hope Now, the Department of Housing and Urban Development reports that only 312 applications have been submitted since the plan took effect on October 1, 2008.
The reason? The program made sense politically at the time since both "sides" of the mortgage equation were required to give something up. However, the program provides few economic incentives to participate. Under this plan, participating lenders were to sacrifice some of the principal value of homes while requiring borrowers to give up future profits and assume monthly of at least 31 percent of their incomes. Lenders are not required to participate, and neither are homeowners, so the poor results were not difficult to predict.
Meanwhile, as the number of foreclosures grows the stigma associated with simply "walking away" from the mortgage diminishes. And so far major banks appear not to be using federal bailout funds to help rescue homeowners. Add to this the weakening economy and rising unemployment and the result could be another major wave of foreclosures.
Two positive developments that could help homeowners are the decline in fuel prices and the decline in interest rates. Lower interest rates will favor borrowers with adjustable rate loans. Both developments will put more cash in household budgets that could be used to pay mortgages. But in the end the recession is likely to bring tens of thousands of more mortgages into default.
Juan Carlos Ginarte
