Apparently, the government is at it again with housing. Considering the $75 Billion dollar HAMP plan that the government set up for housing has been an abysmal bust, the gubment now wants to forgive loan balances for underwater homeowners. They are going to use $14 Billion of the repaid TARP funds to pay for this.
The first key element is that the government will provide financial incentives to lenders that cut the balance of a borrower’s mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.
Until recently, administration officials had been reluctant to encourage lenders to cut the principal balance, worrying that this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.
Twenty five percent of loans are underwater right now. If the government forgives a portion of this loan balance, do they honestly think that people won’t intentionally default in order to get the principal writedown. This is a total act of desperation. Now, they want the taxpayer to fund this silly program.
Even worse, the government is looking to the FHA to cover these programs. FHA is facing enormous financial constraints right now.
the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan. The FHA will offer incentives to lenders that reduce the amount borrowers owe on their primary mortgages by at least 10 percent.For those borrowers who have more than one mortgage on their house, the FHA will allow refinancing of the first loan only. The new loan and any second mortgage could not exceed 15 percent of the home’s value. This approach is meant to benefit not only borrowers but also lenders by allowing them to offload mortgages that might otherwise fail.
Just let the markets work. I feel for people who bought too much house, but they simply cannot afford the home they own. This will just be another waste of taxpayer dollars and motivate others to become delinquent. When you let markets work, even if it is through foreclosures, everyone benefits. Realtors, home repair folks, mortgage bankers and others become gainfully employed, and the markets start to normalize.