New Foreclosure Assistance Proposal: Will It Work?

The newest D.C. government deal to help homeowners dealing with mortgage balances higher than their homes’ fair market value (FMV) awaits agreement from U.S. states attorneys general. Proponents predict this newest option could result in $20 to $25 billion in funding for U.S. homeowners still “under water” with their properties.

At a recent White House briefing, Housing and Urban Development (HUD) stated that pertinent documents have been shared with all states’ attorneys general. Washington is awaiting imminent decisions to agree (hopefully) to the proposal.

Basic Elements of the Refinancing Proposal

Around 1 million homeowners, still with mortgages higher than the FMV of their homes, may be eligible to receive up to $20,000 loan principal balance reductions. The lender side of the equation provides that mortgage servicers in states that agree to participate will be immune from state challenges regarding loan servicing or improper mortgage originations.

Mortgage lenders, however, could still be sued by homeowners for inappropriate origination or collection activities. Lenders would also lack immunity from state attorneys general who might pursue criminal investigations of servicing or origination improprieties.

Any lenders accused of improperly foreclosing on homeowners, e.g., using “robo-signers,” could also be subject to homeowner lawsuits or criminal charges from state legal eagles. There is, however, no “back date” provision. Homeowners who suffered foreclosure prior to this provision would not be able to recover their homes, regardless of the propriety of their lender/servicer actions.

Potential Benefits of this New Proposal

Over 900,000 homeowners dropped out of the previous foreclosure assistance programs, often because their lenders never even returned their phone calls. This proposal should ensure that lender/servicers will better communicate with borrowers. Communication, alone, could have helped almost 1 million homeowners. Therefore, this new proposal offers some welcome benefits.

Should all 50 states accept this deal, it could become the best housing relief program for homeowners since the real estate crisis began. Although some attorneys general have panned the terms as insufficient remedies for average homeowners, most legal experts have remained silent or neutral. Some attorneys general are still fearful that their agreement could hamper their current or future investigations into mortgage issues.

The advocacy group, Center for Responsible Lending, cautiously supports this proposal. Claiming that, while this deal is “no silver bullet,” it purports to hold mortgage lenders accountable for the propriety of their actions with borrowers. Initially, lenders/servicers remain wary of enforcement of the immunity provision, still worried that some states’ attorneys general would aggressively pursue investigations and/or other litigation.

If this deal works, buyers will also benefit. Those homeowners wishing to sell their properties, who become beneficiaries of reduced mortgage balances, may offer reasonable asking prices, reflecting their stronger financial position. Instead of the frustrating negotiations involved in “short sales,” many buyers may be able to make “arm’s length” offers to sellers resulting in a new home purchase for the right price.

Check out our previous on articles on the Top D.C. Neighborhoods and Buying or Selling Homes in 2012

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