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The Bush administration's plan to encourage lenders to help strapped subprime borrowers may help some people stave off foreclosure this year.
The U.S. Department of the Treasury estimates the number of subprime borrowers with loans resetting to higher interest rates over the next year at about 1.8 million. In all, there are more than 7 million outstanding subprime loans, according to the Treasury Department.
Under the Hope Now plan that the president introduced late last year, a coalition of lenders, investors and nonprofits is working with homeowners unable to keep up with their monthly payments.
Last week, six major lenders — Calabassas-based Countrywide among them — announced what they're calling Project Lifeline, an offer to freeze rates for a month for homeowners on the edge of foreclosure.
When the plan was announced, Treasury Secretary Henry Paulson said it was much needed, noting that "the worst isn't over."
Many wondered whether 30-day forbearances would really help. Somnath Basu, professor of finance at California Lutheran University in Thousand Oaks, told The Star last week, "it's sort of like putting your head in the sand."
However, banks and mortgage companies have to do something. There is an incentive to participate in these programs because foreclosures are costly (one estimate puts the average cost for a lender at $30,000 for every foreclosure), and the sheer number of bad loans has hammered their earnings.
Advocates for homeowners say the plan doesn't do enough. According to estimates by the Center for Responsible Lending, fewer than 3 percent of the outstanding subprime borrowers will be helped by the plan. The center estimates almost 2,000 will be foreclosed on in Ventura County, according to a report issued late last year.
The county and the rest of the nation are expected to get a boost from the $168 billion economic stimulus package. The measure includes temporarily raising the limit on Federal Housing Administration loans and the cap on loans that Fannie Mae and Freddie Mac can buy from $417,000 to $729,750.
While raising the loan limits will be beneficial, it won't be enough to spawn a recovery, said John Paglia, a finance professor at Pepperdine University. He noted that it doesn't solve the imbalance between monthly housing payments and monthly incomes.
Meanwhile, the Hope Now coalition is teaming with about 94 percent of the subprime lenders, according to the Treasury Department.
In some cases, loans are being modified or repayment plans are being set up to allow borrowers to catch up. A "Hope hotline" (888-995-HOPE) has guidelines for lenders and borrowers on how to avoid foreclosure.
On an average day, the hotline receives about 4,000 calls.
Renegotiations by lenders are still voluntary, and even with new loan terms some homeowners still cannot keep up. In the past, a homeowner who negotiated a "write down" of his or her loan principal would have to pay taxes on that amount. Congress has passed legislation allowing homeowners to avoid paying those taxes over the next three years.
At a banking forum in Las Vegas earlier this month, Robert Steel, the U.S. Treasury Under Secretary, tried to see the current crisis as a glass half full.
"About 1.8 million subprime mortgages are expected to reset over the next two years, but not all will end in foreclosure," he said at the American Securitization Forum. "Many homeowners will be able to afford their new payments without trouble or will be able to qualify for refinanced, fixed-rate mortgages on their own. Others, however, have stretched far beyond their means, and, unfortunately, foreclosure may be unavoidable."
Steel said the challenge is identifying those in the middle: homeowners who can be helped to stay in their homes with modest modifications of the terms of their loans.
Source:-http://www.venturacountystar.com/news/2008/feb/17/banks-earnings-hammered-by-sheer-number-of-bad/
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