By Moe Bedard
While the cramdown bill dies a silent death in the senate the government has guaranteed to pay lenders nearly ten billion more in taxpayer dollars to support loan modification efforts. Federal funds will initially be going to the largest lenders and servicers including Chase, Citigroup, Wells Fargo, GMAC, Saxon and Select Portfolio Servicing.
As part of the federally subsidized program, borrowers that qualify for the program will have their payments reduced to 38% of pre tax income and the government will reduce the payment to 31% via tax dollars. This is a major commitment that the government has made and I sincerely hope the plan works out. There are two specific areas of concern I have. First, that lenders offering these modifications utilizing our tax dollars provide modifications to people that can actually afford their homes. It would be a shame to use tax dollars to support banks and services while Main Street is placed in to loan modifications they can’t afford.
My second, and related area of concern is that lenders put a stop to programs that result in high re-default rates. Whereas this program maintains a specific debt ratio target, my hope is that lenders will also take in to consideration the overall debt burden the borrower has, not just a target percentage to reduce the mortgage payment to.
Articles on this topic abound. Read more at CNNMoney, The Wall Street Journal and Reuters.
That has been my most recent problem. Alot of borrowers fall into the ideal Debt-to-Income ratio however they owe so much to unsecured loans that they still cannot pay all their bills. I also agree with the concern that our tax dollars may be going toward loan modifications for people who cannot afford their mortgages regardless. Many lenders gave out loans to people without the financial resources to maintain a home. Modifying someone with no income, for example, seems to me a waste of time-and in this case-taxpayer dollars only to prolong the inevitable. I hope that this plan doesn’t end up biting us in the butt.