Sorry, Homeowners: Fed Foreclosure Program Rigged for Banks

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Last February, President Barack Obama promised to help 9 million homeowners stay in their homes. How many have been helped today? Only about 650,000 have been offered trial modifications and a small percentage of those received permanent modifications. No numbers have been released about how many got help with refinancings, but many complain about the high closing costs of the Obama program.

Why have these programs been such an abysmal failure as millions face foreclosure? The administration seems more worried about protecting the profits of the banks than caring about the people struggling or the neighborhoods deteriorating.

The impact on a family or the impact on the neighborhood do not factor in at all when the decision about whether to offer a permanent modification is made. The primary test is what works best for the bank. The bank uses a Net Present Value test to determine whether it can make more money offering a modification or foreclosing on the home. The bank even has leeway in what numbers it picks for the value of the home and the discount rate at which it will run the test. With banks calling the shots, who do you think will come out on top? Some mortgage executives expect only about 25% to 35% of those who apply for modifications will get them.

Shouldn't a Making Home Affordable Program be about finding a solution that's good not only for the banks, but for the home owners and the neighborhoods as well? With so many foreclosures, neighborhoods hardest hit see prices take a nose dive, which reduces the value of the homes for everyone - including the banks. In order for this program to work, the test for qualifying for a loan modification should also consider the impact on the neighborhood and on homeowners.

Sure, homeowners have made bad decisions buying more than they could afford or buying at the top of a bubble. But, they didn't make that mistake alone. The bank financed the purchase with a mortgage, so as professional advisers they should have to shoulder some of the blame for the errors.

Why should banks come out smelling like roses, while individuals and communities suffer? The loses should be shared by all. Banks helped to create this mess and, after getting bailed out by the government, should be forced to shoulder some of the costs of fixing it.

Some have pushed to allow bankruptcy judges to force a cramdown of loan principal. For example, if the market value of a house dropped to $100,000 and the mortgage principal is $200,000, the judge could force the bank to lower the principal to market value in bankruptcy court. That's actually done for a lot of other types of loans. But, so far, there's been strong resistance to the idea in Congress. If banks knew a cramdown was possible, they may be more likely to modify a loan before it goes to foreclosure or bankruptcy court.

The Obama administration made it possible for the banks to get trillions to shore up the financial system. It's payback time. The banks must be forced to play and help Main Street America get back on its feet as well.

Lita Epstein has written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosure.
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