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Unable To Refinance? Help May Be On The Way.

[Oct 30, 2008.]


The Wall Street Journal is reporting that a proposal designed by the Federal Deposit Insurance Corporation (FDIC) and the Treasury Department is nearing fruition.

Estimated to cost between $40 billion and $50 billion, the plan would have the government agree to share a portion of any losses on a modified mortgage offered by lenders.

The plan is intended to help those homeowners that are nearing or facing foreclosure. Falling home values, tightening guidelines, and impending mortgage rate adjustments are making it difficult for borrowers to refinance their mortgage into more affordable terms or continue making their monthly payments.

By agreeing to share a portion of any losses on future defaults of modified loans, the government hopes that more lenders will be open to modifying the terms on loans for about 3 million homeowners.

A loan modification can include the reduction of principal balances, reduction or interest rates, and an increase in the term of a loan. All are meant to help reduce the monthly payment and make it more affordable for the homeowner.

Critics of foreclosure bailout proposals are primarily upset with the notion that we may, through the use of tax payer money, help irresponsible homeowners that took out loans they knew were not affordable.

Proponents cite the costs of foreclosure as the driving force behind taking action. Standard & Poor's estimates that the average foreclosure costs 26.3% of the outstanding loan balance. So, for example, if Bank A has a customer with a $250,000 loan balance that goes into foreclosure, the bank stands to lose $65,750.

Our financial system is unable to support those types of losses so a solution must be found.

Also worth noting is that foreclosures add supply to local real estate markets driving down prices, are a safety concern for local communities, and have a direct impact on the financially responsible neighbor that opponents claim they are trying to protect.

Homeowners unable to refinance their mortgage and or convince their lender to modify their loan may be one step closer to a more affordable payment that will keep them in their home.


About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

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