Facing Foreclosure - Can the US Government fix it with money?The US Treasury Department has announced a measure that they hope will save homeowners from foreclosure. Dubbed “Project Lifeline”, it hopes to give folks a chance to find new mortgage options and offers a delay in foreclosure for 30 days.

Having come close to it personally (my short sale story), and having met hundreds of friends and readers going through it, I don’t personally believe that this will offer much in the way of help for those facing foreclosure. Although the HOPE NOW alliance sounds good in person, this is not one of those problems that can be fixed by throwing money at it.

Today, six of the largest servicers, who represent 50 percent of the mortgage market, are announcing Project Lifeline, a targeted outreach to homeowners’ 90-days or more delinquent that may lead to a “pause” in the foreclosure process. This is an important new initiative, targeted to reach not only subprime borrowers, but all 90-day delinquent homeowners nationwide with a step-by-step approach to find individual solutions to individual problems. We encourage all HOPE NOW servicers to adopt this new program.

Project Lifeline is aimed at homeowners who face a real risk of losing their home, but have not yet addressed the problem. Perhaps they are hoping to find a way to get current on their mortgage payments, or perhaps they don’t think any solution is possible. For whatever reason they have not yet taken action; our hope is that today’s announcement will reach them, and they will reach out immediately for help – especially now that the foreclosure process is upon them.

Of course, there will be homeowners who still take no action, and some will simply walk away from their mortgage – particularly those borrowers who put little or no money down and whose mortgage exceeds their home value. No program can bring every struggling borrower into the counseling and evaluation process, and we cannot help those who choose not to honor their obligations. But Project Lifeline has the potential to offer new solutions to responsible, able homeowners who want to keep their homes.

So essentially, six major lenders are offering to delay some foreclosures for 30 days to try to work out a more affordable mortgage for those delinquent on their mortgage payments for more than 90 days.

Bank of America, Citigroup, Countrywide Financial, JP Morgan Chase, Washington Mutual, and Wells Fargo are participating lenders.

Now, why won’t this work? For a couple key reasons.

1) By Day 90, Foreclosure Has Too Much Momentum

For many people, a mortgage is their first bill they worry about paying. Many will get behind on the electric or water bill, perhaps even an HOA due or two. But few will miss a mortgage payment unless they truly are unable to pay or doing so would not allow them to pay other “serious” bills (car, daycare, etc). After you get to the point where you’re looking at missing a second payment, you realize that you may be in deep water all alone. Now, not only are you TWO months behind, but now you still have your next payment. After three months, hopelessness sets in. You’ve maxed out your credit cards, lines of credit, and can’t get approved for any more loans.

You realize that “getting good” with your lender requires thousands and thousands of dollars you don’t have. In addition to still staying current on normal payments thereafter. Even if you could get enough to pay for one or two months, you’re still behind and have to pay it all in full. To successfully pull yourself out and get current, you need to not only afford your monthly living costs, but also find a way that doesn’t put you in ADDITIONAL debt. Save for free money or forgiveness, that ain’t happening.

2) You Can’t Relax Lending Standards To Fix A Problem CAUSED By Relaxed Lending Standards

Most folks facing foreclosure are locked in a tricky loan package. One that allowed them to own initially before things like property taxes got re-evaluated and interest rates were re-adjusted. Ignoring stated income loans, which simply qualified the unqualified through either consumer or lender fraud, the remaining homeowners stuck in other adjustable rate or interest only loans still won’t qualify. They qualified initially because of relaxed standards.

As it turns out, they shouldn’t have and are now facing losing their home. Even if you eat a little of the cost as a lender, you simply can’t relax standards enough to re-qualify a majority of these people into a new mortgage. I see lenders willing to risk a bit more, but I do not see them willing to give up thousands or tens of thousands of dollars per homeowner to help get them into a better package. It’s not profitable and the lenders aren’t required to do so. They’re going to skim the cream, call it a day, and put out a press release. Foreign investors are already seeing huge losses caused by exploding subprime debt packages sold to them so even that well is now drying up.

3) Housing Values Have Crashed – You Can’t Convert Imaginary Equity Into Real Money

Even for homeowners who did NOT buy at the peak, they’re still most likely upside down tens of thousands of dollars. They likely bought a tad beyond their means, imagined that even if the market crashed they’d STILL have some appreciation, even if at a lower and more realistic percentage. However when prices fell like they did, those homeowners began to realize that they owe money on an “asset” that is worth LESS than they owe!

Now that they can’t run to the bank for a home equity loan to help weather the future financial costs, they’re at a loss. Most folks can gather a couple thousand dollars by some means, but dealing with several months of house payments and negative equity in a house requires tens of thousands of dollars. There’s just no place to grab that money from.

But What About The Stimulus Package?

The sad truth is that the money people in these situations will get to help stimulate the economy will often be spent trying to catch up to their mortgage. As a result, they’ll be a little less behind, but will have done nothing to stimulate the economy.

This isn’t a problem you can throw money at. Growing inflation has caused every one of those dollars to be worth less every year and growing national debt is forcing into financial slavery. Until we attack those problems first, we can’t expect to throw money at the struggling and hope it will magically fix the problems they’re in.

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