Unable to stem foreclosures, Obama tries the next best thing

Although President Obama launched the Making Home Affordable program to great fanfare in March, the actual results have not been impressive. He projected that the program would help nine million people keep their homes. Lenders representing 75 percent of U.S. mortgages agreed to participate. Yet so far, just 50,00 homeowners have been offered lower-cost mortgages. Obviously, the banks said one thing and have been doing another.

With foreclosures accelerating, and a major blow to its credibility looming, the administration is now giving banks another option for, if not helping people stay in their homes, at least allowing them to hold onto some shred of financial security. The government will pay institutions participating in the Making Home Affordable program incentives for allowing short sales and deeds in lieu of foreclosure. Lenders will get $1,000 for allowing a short sale or deed in lieu of foreclosure, and former homeowners who lose their home will get $1,500 for relocation expenses. Prior to this, incentives were only given for loan modifications.

In announcing the program, Treasury Secretary Geithner said, "If modification is not possible, we are also announcing steps to encourage a quick private sale or voluntary transfer of property, which will save homeowners money and protect their financial future."

That's a bit of a stretch. While a short sale or deed in lieu of foreclosure does not hit a credit score as hard as a foreclosure, the negative mark still stays on a credit report for seven years. If a person applies for another home loan in that seven-year period, they're likely to face a lot of rejection or much higher interest rates.

On the other hand, it's apparently been taking months for homeowners to win approval for short sales. So if this new program does move banks off the dime, we'll probably see a lot fewer foreclosures.

It also offers some relief for people who had no chance of qualifying for a loan modification. I'm thinking specifically of those who got their loans using "stated income" or "liar loans." Overstating income immediately knocks a person out of the loan modification program. A New York Times writer described his own use of liar loans to get a mortgage in last Sunday's magazine.

Will Obama succeed in convincing more banks to participate with these new incentives? Obviously we need to see more than lip service from the banks to reduce the growing numbers of foreclosures. The only question I have is will a $1,000 incentive be enough to get the banks on board?

Lita Epstein has written more than 25 books, including The 250 Questions You Should Ask About Buying Foreclosures.

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