State foreclosure prevention programs not all that successful so far.

Many states have tried to do something to help their citizens whose houses are under foreclosure threat. Some (like Massachusetts) have declared temporary moratoriums on all foreclosure activity to prod lenders into trying to make some sort of deal with their borrowers. Many states (including Mass, Ohio, Maryland and New York) have started their own refinancing programs to help borrowers replace their subprime loans with something more manageable.

But as a recent headline in the Wall Street Journal declared “States Mortgage Relief Programs Aren’t Helping Much.” The problem with the states’ refinancing programs is that most of the people asking about the refinancing programs don’t qualify, either because their credit records are so bad or because their house is “under water” (the value of the house is less than the mortgage value).

Those who have credit and a mortgage less than their house value are usually able to secure other refinancing, such as an FHA loan. The FHA has refinanced 145,000 mortgages in the past seven months.

Congress is close to passing bills that would provide more relief, but it remains to be seen what they will contain and whether or not the White House will go along. It does appear as if they will not pass the one that was at the top of my list: Giving bankruptcy judges the authority (with some limits) to “cram down” mortgage loans to less than the value of the house when a house is “under water.”

Judges are not supposed to approve bankruptcy plans that are not likely to work out, and when there is no hope for a reasonable solution, the house will be foreclosed, but at least everyone (including the lender) gets their day in court.

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