Federal Government Steps In With Foreclosure Prevention Plan

On Thursday, December 6, 2007, President George W. Bush announced his plan to offer a foreclosure prevention plan to qualified homeowners in the face of a wave of potential mortgage defaults seeping through the nation. Although the president's plan is one that brings together private interests – lenders and homeowners – and is said at this time to not require government funds, or more accurately, taxpayer dollars, it is impossible to please everyone, and there are critics. Not all the critics are politically motivated. There are certainly legitimate causes for concern. However, the situation at hand is a difficult one, and it is unlikely that there is a solution that will satisfy everyone.

In many ways, this recent plan is a continuation of efforts initiated by presidential directives in August of 2007. At that time, the president requested that Treasury Secretary Henry Paulson and Housing and Urban Development (HUD) Secretary Alphonso Jackson try to form a coalition of sorts, working with non-profit organizations geared towards helping struggling homeowners, private lenders, and homeowners fighting to keep their homes. Part of those efforts involved mortgage counseling and facilitating refinancing loans to those with sufficient credit and mortgage loan repayment histories.

The new plan moves further along that path of helping qualified homeowners avoid foreclosure and stay in their homes. One key element for those who have adjustable rate mortgages, or ARMs, is the freezing of the current rate of interest for 5 years. This is available to homeowners who, among other qualifications, is currently up to date with their mortgage payments, but expect to have difficulties upon reset of the interest rate. Other potential solutions include shifting the mortgage into a FHA Secure loan and refinancing the original mortgage.

However, critics point out that this new plan does very little to help homeowners already seriously behind on mortgage payments or in foreclosure. Officials have responded to that criticism, stating that those homeowners can seek help through the same channels, and that their situations will be evaluated on a case by case basis. Yet, the fact remains that these struggling homeowners may fall well outside of the list of guidelines and qualifications that define eligibility for such assistance programs.

Other critics suggest that the plan is really devised to help prevent lenders from taking massive losses, rather than out of concern for families that will lose their homes. There may be a certain degree of truth to that, but it is worth noting that if major lenders and banks do fail, it is going to have serious economic fall-out for the nation, perhaps even damaging the global economic structure.

Already we are seeing liquidity dry up and credit tighten, making it difficult to maneuver in the world of business and finance. While on the one hand, one could shrug that off as their just desserts for creating and/or enabling such a mess, on the other hand, those negative effects will trickle down to the average consumer in a variety of ways. Those effects could include higher credit card interest rates, less financing options available, and even job losses as business and growth grind to an almost halt.

Another potential bit of trouble associated with the president's new plan has to do with the investors that bought the debt. If the interest rates are frozen on the debts that an investor is holding, then that investor is not going to get the same amount of return he was expecting for his money. Therefore, the specter of investor lawsuits looms over this recent plan. Not all investors, though, are looking at it in that fashion. Many, frightened by the current situation, are pleased to see a better chance of getting at least a significant portion of their investment back, rather than losing the whole sum to default.

Critics of the new foreclosure prevention plan do have legitimate causes for concern, as do the taxpayers that balk at the potential of a bail-out that will cost them money in the end. Although the plan is said to be a “private sector” agreement at present, clearly if some homeowners are steered into federally guaranteed loans, the potential for taxpayer dollars to come into play is present, and that's just one of the more obvious ways of such a situation occurring. However, the current set of economic circumstances is extremely challenging, able to affect the economy on an incredibly broad scale, and devising a plan to bring the situation under control is no easy task, making any plan offered awfully easy to criticize. The bottom line of the president's foreclosure prevention plan, whatever its true motives may be, is that it will help some homeowners retain their houses in their struggle against foreclosure.