According to a March 5, 2009, Reuters report, “about one in every eight U.S. households, a record share, ended 2008 behind on their mortgage payments or in the foreclosure process.” Time Magazine reported, in a story dated March 4, 2009, that almost 1 of every 5 homeowners in the United States is upside-down on their mortgage, owing more than the home is worth, which doesn’t bode well for future foreclosure rates. If home prices fall another 5 percent, according to data provided by First American CoreLogic, a California firm specializing in real estate information and cited in the Wall Street Journal on March 4, 2009, that could result in a full 25 percent of homeowners being upside down.


In early February of 2009, the Economist made note of the foreclosure trouble brewing in the Alt-A mortgage arena, citing Goldman Sacs analysts, who said they expect industry write-offs of about $600 billion from the $1.3 trillion of Alt-A debt. Thus, in addition to the numerous homeowners struggling to make their mortgage payments and stop foreclosure, already staggering and all but insolvent lenders have little to look forward to other than an intensifying battle to stay afloat. With these circumstances in mind, the Obama administration has been working to develop a plan that may ease the situation for both homeowners and lenders.


In an article published on March 4, 2009, the New York Times referred to the Homeowner Affordability and Stability Plan as “the most ambitious effort since the 1930s to help troubled homeowners.” The plan is expected to be able to help approximately 9 million homeowners to keep their homes and – right now – is said to cost $75 billion. However, it should be noted that the plan, which is, according to the New York Times, “offering lenders and borrowers big incentives and subsidies to try to stem the wave of foreclosures” is also of real benefit to lenders – perhaps even more so than to borrowers.


One aspect of the plan in which this is particularly noticeable is the part that focuses on making refinancing available to those with little or no equity in their homes and even to those who are slightly underwater on their mortgages, owing more than the home is worth. While many news sources place the number of homeowners currently up-side down on their mortgages at about 1 in 5, there are areas throughout the nation that are experiencing significantly higher numbers of homeowners owing more on their mortgages than the homes are worth right now.


For example, according to the Time article and the information it cited from First American CoreLogic, “the states with the highest percentage of negative-equity borrowers are… Nevada (55.1%) and Michigan (40%), Arizona (31.8%), Florida (30.3%) and California (29.5%) round out the top five.” Time went on to explain that within the states, there are pockets of even higher percentages of owners owing more on their homes than they are currently worth. “One pattern: exurbs, where homes are newer and loans more likely to have been signed during the bubble years, are harder hit. For instance, in the metro area that includes Los Angeles, 23% of homeowners are faced with negative equity. Fifty miles to the east, in the area that includes Riverside, 45% are.”


As pointed out in a March 5, 2009, article published on, falling home prices have sucked trillions of dollars of worth out of the American real estate market. The widespread condition of being underwater on mortgages is very dangerous to already struggling lenders, many of which have sustained significant losses as sub-prime lending experienced a meltdown right alongside of the bursting of the housing bubble. That’s because there comes an underwater point at which it simply makes more fiscal sense to walk away from a home. referred to this as “rational default,” quoting Norm Miller, director of real estate programs at the University of San Diego School of Business Administration, who said he expects that fully one third of those who become upside-down on their mortgages by 20 percent to walk away. Foreclosing lenders face a saturated housing market, deflated home prices, and the likelihood that selling foreclosed homes will be difficult and may fail to bring in a break even amount, leading to further losses.


The president’s plan to ease refinancing for those not eligible under current lending standards applies to Fannie Mae and Freddie Mac secured loans, and is designed to help those with less than 20 percent equity in their homes. Those eligible for this assistance may be up to 5 percent underwater on their mortgages. According to a February 18, 2009, post on the White House blog regarding the matter, those who are unsure about whether or not they have a loan secured by Fannie Mae or Freddie Mac, can contact their lender. However, on the White House website, the administration said that it is hoping to ease the process by setting up an easy to use database.


The president’s plan also seeks to set up a program that offers significant incentives for both borrowers and lenders to participate in loan modification. Naturally, those incentives are financial in nature, hence the hefty price tag attached to this foreclosure prevention gift to struggling homeowners and frightened lenders from taxpayers. Negotiations can include a reduction in principle, as well as decreasing interest rates and making changes to other loan terms. In fact, according to the White House blog, “borrowers who pay on time for five years can have up to $5,000 applied to reduce their debt by the end of that period.” Both borrowers currently behind on payments and those who are still keeping up, but with great difficulty, are eligible for participation in this portion of the administration’s foreclosure prevention plan.


There are many who question the wisdom of bailing out individual homeowners with taxpayer funded foreclosure prevention programs. There are some taxpayers that feel a bit resentful that their reward for careful planning and spending is to pay for the mishaps and mistakes of others. There are some that see this program as aiding and abetting the lax lenders that were all too pleased to make money from loose lending but are now pleading for help to withstand the losses such practices brought. All are valid concerns. However, if you are struggling against or facing foreclosure, you may as well be pragmatic about participating in the foreclosure prevention plan, as taxpayer money is going to be applied to the program whether you use it or not. Therefore, you may as well be among those that benefit from it, if you are eligible.

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