Bush Announces Plan To Help Homeowners Facing Foreclosure
On August 31, President Bush proposed a plan that will help homeowners who can not afford to make their mortgage payments.
Although it is obvious that there is no "one size fits all" solution to the mortgage crisis, the plan recognizes that something has to be done to help many American homeowners avoid filing bankruptcy and losing their homes in foreclosure.
The help offered by the proposed plan is rather limited. It attempts to help some of those in need, while not endorsing a full-scale bailout.
The plan utilizes the Federal Housing Administration (FHA), which was developed during the Depression in 1934 to give lower-income families an opportunity to become homeowners. The President's proposal aims to give the FHA a larger role in American mortgages than it has had in recent years. The FHA has withered due to aggressive lending practices in the private sector by sub-prime lenders.
Bush's new plan, if adopted, will also give some families some tax relief by temporarily waiving the income tax that families have to pay on the portions of their mortgage debts that are forgiven by lenders.
Click Here For Free 2 Minute Evaluation
The president is also encouraging lenders to voluntarily offer homeowners some assistance. He is promoting measures to improve disclosure and urging lenders to make sure that homeowners fully understand the terms of their loans so that less bad loans get made in the future. He is having the government advertise the options that homeowners have through the FHA.
Bush's plan is a compromise. It offers much less help than the Democrats have called for, yet is more involvement in the mortgage foreclosure mess than he previously wanted to have.
The proposed plan doesn't offer any direct financial relief to homeowners who are in financial trouble as a result of their mortgage loans. Such relief would have been quite expensive and is not in the budget for this plan.
The Mortgage Bankers Association was pleased with Bush's announcement and said, "Every foreclosure is a tragedy".
However, conservatives are quick to offer criticism to the plan. Some people say that Bush's plan to help homeowners in financial distress gives government too much of a role in the economy and that people who make mistakes should be the people who pay for them.
Part of the new plan proposes to allow borrowers who currently have mortgages in the private sector to switch over to FHA-insured loans to save money. Taxpayers aren't really going to like this as much as the private lenders though, because the lenders will be paid in full and the FHA and taxpayers will take on the risk of default on the mortgages. A shift to risk-based insurance pricing is intended to mitigate that risk.
If the plan is adopted, it will breathe new life into the FHA. The FHA has faded into the background in recent years because of restrictions making it unable to compete with aggressive subprime lenders. The FHA provides mortgage insurance through a network of private lenders. Bush has asked for Congress to bring the FHA up to speed by passing a "modernization" bill that will allow the FHA to insure loans with lower down-payment requirements and higher loan limits.
Until now the FHA could not help people who were in default on their mortgage loans, but that is changing. Such loans were previously deemed too risky.
Bush announced the FHASecure plan, which will not require congressional approval, which "will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing" According to the FHA.
Beginning January 1, 2008 the FHA will for the first time begin charging customers different interest rates based on their credit scores. Borrowers with poor credit scores will pay a higher interest rate.