Proposals Continue to Surface for ARM Bailouts

The following appeared recently in Forbes magazine and is similar to other proposals that have been offered over the last several months.

Gross Calls for White House Bailout

Bill Gross, the king of the American bond market, says a Federal Reserve rate cut is not the answer to the mortgage crisis. Instead, the billionaire credit-markets guru is asking President George Bush to rescue homeowners who can't pay their bills.

The call comes as Wall Street clamors for the Federal Reserve to cut its federal fund target rate to minimize the fallout from mortgage defaults. Gross said Thursday, however, that even a steep rate cut wouldn't necessarily clean up the mess because upward adjustments on adjustable rate mortgages would continue.

Many homebuyers took out adjustable-rate mortgages to take advantage of low interest payments for the first two or three years. When their rates reset higher after the initial period, those buyers couldn't handle the bigger bills. (See: "Home Foreclosures Rise In July")

The outspoken Gross called for help from the White House because of its history of bailing out financial failures: "Why is it possible to rescue corrupt savings and loan buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 Long Term Capital Management crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner?"

Gross said that there's a need for action because the continuation of high mortgage defaults will cause a housing bust with widespread effects. Over two-thirds of American households are homeowners, so a decline in home prices would likely have disastrous effects on consumer spending.

Gross is managing director of one of the world's largest fixed-income managers, PIMCO. Through savvy bond trading, he's accumulated a $1.2 billion fortune that makes him the 799th-richest person in the world. He's an avid philatelist and owns every stamp produced in the United States between 1847 and 1869.

A presidential bailout of homeowners who can't pay their mortgages would likely be a boon for the companies making the mortgages. Originators like Countrywide Financial, Accredited Home Lenders, and H&R Block, which has a subprime lending subsidiary, have been crunched by rising defaults. It would also benefit companies like Thornburg Mortgage that hold mortgages for investment.

Now May Be the Time To Negotiate

Times have been tough the last several months for homeowners facing foreclosure. In apparent disregard for the statistics showing a steady rise in the numbers of Americans defaulting on their mortgages, many banks have continued to play hard ball in the negotiation process, refusing short sales and showing reluctance to help homeowners work out acceptable payment plans. Recent news shows that this attitude might finally be shifting. Government agencies are now pushing mortgage servicers to work with families facing foreclosure rather than allowing the loans to default.

Recently, several federal and state agencies banded together to issue a staement urging mortgage banks to be more flexible and proactive in their negotiations with borrowers. According to Mortgage News Daily, "This statement is aimed at companies that are servicing sub prime and other mortgage loans...A number of the servicing companies (Wells Fargo and WaMu for example) are subsidiaries of government regulated banks. While the statement is not binding on the servicing companies, it asks that they review the governing documents for the securitization trusts to see how much authority they have to restructure loans that are in risk of default.

The statement points out that these documents may permit the servicer to be proactive in contacting borrowers and, where appropriate, apply loss mitigation strategies. It outlines four areas where servicers could be proactive:

Identifying borrowers at heightened risk of delinquency or default;

Contacting borrowers to assess their ability to repay;

Assessing whether default is "reasonably foreseeable;"

Exploring a loss mitigation strategy that avoids foreclosure or other actions resulting in the loss of home ownership.

The statement said that loss mitigation is generally less costly than foreclosure, particularly when undertaken early in the process. Such strategies can include loan modifications; deferral of payments, extension of the loan term, conversion of ARMs into fixed rate or fully amortizing ARMs, capitalization of delinquent amounts, or a combination of solutions."

To read the entire post click on: http://www.mortgagenewsdaily.com/962007_Mortgage_Servicing.asp

If banks follow the above suggestions, it may become a little easier to avoid foreclosure, if avoiding foreclosure and keeping your home is in your best interest. We advocate that foreclosure and bankruptcy are powerful tools to consider when you are facing financial challenges and should not be dismissed as only a last resort. However, for those who do decide to attempt to renegotiate their loan and keep their home, the above statement is certainly a little bit of good news.

If you would like more information or a referral to a bankruptcy or short sale professional in your area, please contact us at foreclosureandbankruptcy@gmail.com