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We all know that the government recently threw life preservers to big businesses and financial institutions, but in examining the government's $700-billion bailout plan, Total Bankruptcy wanted to analyze what the plan does, or doesn't do, for homeowners facing mortgage foreclosure.
The bill, which was passed 263-171 on October 3, 2008 by the House of Representatives and quickly signed into law by President Bush, gives the government the power to buy troubled mortgages from the banking industry. This would also include the government buying the securities to those mortgages.
Once the "bad" mortgages are under federal control, officials are required to "implement a plan that seeks to maximize assistance for homeowners," according to the language in the revised bill.
Those same government officials are then supposed to use their power to reduce the number of mortgage foreclosures in the housing market and deliver relief to the American people.
There is skepticism to this plan-and for good reason.
The federal government has already been encouraging the banking industry to modify mortgage terms when possible. And, while the government's been asking banks to be reasonable with struggling homeowners, foreclosure rates have soared.
So, it appears that this hasn't been working, because-as expected-the lending industry is looking out for its best interests, which is to make the most money it can off of these "bad" mortgages.
The hope with this revised plan is that the government will have more muscle to demand that banks modify mortgages so homeowners could keep their homes.
According to a recent Los Angeles Times article, mortgage industry experts say most lenders will make modest changes to payments plans and terms to avoid the time and cost of foreclosure; however, many banks are reluctant to change the terms of a mortgage if they determine that the homeowner doesn't have the income to make the modified payments.
But the House Financial Services Committee is optimistic about the new plan and thinks that the government's involvement in the mortgage-modifying process will be key.
Unlike a private lender, "the government is here to help," a spokesperson for the House Financial Services Committee told the newspaper. "We want to rebuild neighborhoods from the ground up."
For as many people who are confident about the bill, there are as many who are doubtful that this plan will actually trickle down to help American homeowners in crisis.
Paul Leonard, the California director of the Center for Responsible Lending, told the newspaper that the bill wouldn't make any difference to most homeowners who are having a hard time making ends meet.
He, along with many others, supported an amendment in the bill that would have changed the bankruptcy law to allow bankruptcy judges to modify or forgive loans in bankruptcy.
Leonard said that this modification could have prevented more than half a million mortgage foreclosures.
This addition to the bailout bill was met with heavy opposition from the lending industry, who said that it would discourage banks from making more loans, thus stifling the economy further.
And after all the political talk about helping people in mortgage foreclosure, no actual federal bankruptcy laws were changed with the bill's passage-much to the relief of the lending industry.
With taxpayers footing most of the risk in the bailout package, many people called for the bankruptcy law to be revised in order to offer something to the millions of Americans struggling to make their mortgage payments.
People who take out loans on vehicles and investment properties are permitted to file for bankruptcy protection and have a judge restructure their payments; however, that's not the case with home mortgages. And that's what people wanted to be changed.
Lobbyists for the powerful banking and lending industries were able to convince Senate members of their argument: the provision would send people running to bankruptcy court and would crumble the rescue effort and further endanger the American economy.
Some politicians may have felt pressure to hurriedly sign the bill because the Bush administration said in a press conference that "our entire economy is in danger" and "without immediate action by Congress, America can slip into a major panic."
Still, many are voicing their disappointment with the amended bill.
"The heart of the current problem is the foreclosure crisis," Maureen Thompson, legislative director for the National Coalition of Consumer Bankruptcy Attorneys told the newspaper. "It is the foreclosures that caused this economy to go into a tailspin."
As mentioned earlier, the bill has provisions that give the government the power to buy and modify mortgages.
The ultimate goal is for the government to acquire these loans and make the monthly mortgage payments more affordable for the homeowners so they can climb out of their debt.
The government has set up a Hope for Homeowners program, where qualified homeowners may be able to refinance into fixed-rate loans that are insured by the Federal Housing Administration.
With fewer foreclosures clogging the market, people are hoping that these measures will help to stabilize the housing market and improve the economy as a whole.
The problem right now is that there aren't many details on how exactly the government plans to identify the mortgages that need to be modified. The bill also doesn't clearly address the role of the loan services.
Stay tuned to Total Bankruptcy for more news and developments on the bailout plan.
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