Will Bush blow another good foreclosure prevention idea?

We’ve described many different ideas for stemming the growing tide of foreclosures — our favorite being giving authority to bankruptcy judges to “cram down” principle and interest on mortgages — but none have managed to gain enough support from both Congress and the Bush administration to become law.  Some state government and voluntary things have been done (like project HOPE) but they have not helped very many people.

Now, with foreclosures hitting nearly 2% of all home loans, Barney Frank (D-Mass), our favorite Congressman, may have come up with something that appears it will pass both the House and Senate. However, the Grinch in the White House has indicated he has some problems with this idea in a speech to the Economic Club of New York. Let’s hope he changes his mind before it is too late to save the situation.

The Frank plan would require some sacrifice on everyone’s part, but it should cost less than a foreclosure and will keep people in their homes, avoiding adding to the growing number of empty houses being stripped for their pipes and metals.

Here’s how it works: The lender agrees (voluntarily) to reset the mortgage principle to 90% of the current value of the home, and to set up an interest rate and payment plan that had a chance of working (this may no involve much reduction in interest depending on the situation). In return for these adjustments (which are, in effect, a voluntary “cram down”) the Federal Housing Administration (FHA) would agree to insure the loan. This means that if the new loan defaults and the house ends up in foreclosure, the government would pick up the tab and the private lender would be off the hook.

The chances of another default are much lower with these adjusted loans, both because the adjustments will reduce monthly payments, but also because the homeowner how has equity in the property and will want to keep that if at all possible.

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