Debt help getting better from Obama administration

The Obama administration has promised debt help for consumers in at least two important areas.  One is mortgage debt and the other is credit card debt.    They have moved forward in both areas in the last couple of weeks.

The credit card bill is being fought out in Congress and it is not clear what provisions will survive the House/Senate conference committee, so I will wait until it comes out before commenting.    But that should not be long as the president has been putting public pressure on the Congress to get this done.

In the mortgage area, the administration has announced guidelines that should advance the housing-rescue program they initiated three months ago.  The new plans offer cash incentives to move the two parts of the program along.

Lenders can now get cash as an incentive to modify mortgages so borrowers can afford to stay in their homes.   The administration claims that lenders have offered 55,000 people mortgage modification terms since the plan started, but this is a drop in the bucket, and the number is expected to drop since the Senate has killed the bankruptcy modification  bill.  (See our other BLOG entries on this aspect of debt help.)  The new incentives are supposed to encourage lenders to modify instead of foreclose.  We shall see.

If loan modification won’t work, and your house is worth less than the mortgage, you have three options:

1.    Foreclosure – a difficult and painful process in which no one wins and you still owe the balance of your mortgage.

2.    A short sale, which is selling your house for less than the mortgage without being held responsible for the uncovered amount.  A short-sale requires the agreement of the lender, and they have been  notoriously slow in approving them.

3.     “Deed in lieu” of foreclosure allows you to hand over the deed to your house and move on with your life without owing the balance due on your mortgage.

The new part of the program would pay BOTH lenders and borrowers for successful short sales or “deeds in lieu” — up to $1,500 to borrowers and $1,000 for lenders.  It would also pay up to $1,000 to second mortgage holders to get them to release their liens on the house.

This looks like a good idea, but I remain a skeptic.  The administration says lenders representing 75% of mortgages outstanding have signed up for the program, but signing up is easy.  Doing something is much more complicated, and many voluntary programs have fallen down when it came to that step.

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