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President Obama forecast many Americans’ desperation, which continues to drag down economic recovery. His attempted solutions, however, have not worked. Federal spending and a multitude of government programs have been created to tinker with the problem. But unsuccessfully. A record 2.9 million properties in the U.S. received foreclosure notices in 2010, according to a Jan. 13 Barron’s story quoting RealyTrac. Homes continue to lose value. At least 9 million households now are affected.
“In the end, all of us are paying a price for this home mortgage crisis,” President Obama said back in February 2009. “And all of us will pay an even steeper price if we allow this crisis to continue to deepen—a crisis which is unraveling home ownership, the middle class and the American dream itself,” he added. His major solution: another failing federal spending program.
With so many owing mortgages larger than their homes are worth, many of them struggling in a jobless society, President Obama rode to the rescue with the standard administration solution: $75 billion and a multitude of bureaucracies. He unveiled his aggressive plan to try to help up to 9 million homeowners avoid foreclosure. But like so many inflated promises of this administration, the air has gone out of that balloon, too. Instead of 9 million homeowners saved, the program has helped only about 650,000 since taking effect last March, according to CoreLogic, an organization that tracks housing trends.
Who else is counting? The Congressional Oversight Panel (COP) is. COP was created in October 2008 to “oversee Treasury Department actions, assess the impact of spending to help stabilize the economy, ensure effective foreclosure mitigation efforts, and evaluate market transparency.” Its job was to report on regulatory reform and the effectiveness of the financial system in protecting consumers.
The COP in a report last month blasted both the Treasury Department and loan services on the abysmal performance of Obama’s Home Affordable Modification Program (HAMP). The panel even had a dollop of blame left for Fannie Mae and Freddie Mac, the government-controlled mortgage lenders of ill repute, according to a Dec. 14 report from MortgageNewsDaily. In the COP’s previous report in April, the panel said it had serious concerns about the accountability, timelines, and sustainability of Treasury’s efforts.
The administration’s mortgage modification plan called for lenders to reduce monthly interest payments to 38 percent of the mortgage holder’s income. The government would then step in with money to help cut payments to 31 percent of the individual’s income. This 7-percentage point funding assistance would be in the form of a check paid to the bank.
The lender would get $1,000 for each modification and $1,000 each year for 3 years as long as the borrower continues to make payments. Meanwhile, borrowers could get $1,000 knocked off the principal of their loan each year for 5 years if they make payments on time. To determine if a mortgage will be modified, the lender has to perform a so-called net present value test. It compares expected cash flow the loan would generate if modified with expected cash flow if it isn’t modified. If more cash flow is expected, the lender is to restructure the loan. Sound a bit complicated?
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