Thus far, all of the government plans to help save the housing market from collapse have been greeted with great fanfare by the media and politicians proclaiming their own expertise at solving the problems of the economy. However, few homeowners seem to have qualified for much actual assistance from the programs, and the requirements that have to be met have been strict for borrowers and lenders.



The Foreclosure Prevention Act of 2008, passed several months ago and signed into law by the president, is no exception. With the collapse of investment banking firms, the entire subprime lending industry, and Fannie Mae and Freddie Mac, it may be time to reevaluate such government programs that were designed to solve the problem and examine how the burdens placed on the parties to the mortgage have prevented homeowners from being able to stop foreclosure with government-backed loans.

There are numerous eligibility requirements for the Foreclosure Prevention Act of 2008, not just for the homeowners' monthly income and expense. However, it is usually the debt-to-income (DTI) ratio that precludes many of those who would otherwise qualify from obtaining federal help under such programs. With the FPA, the trend is no different, and the legislation actually prevents homeowners who truly need help from even qualifying for it.

On the original loan, borrowers must have had a DTI ratio above 31 of their gross income (income before taxes). For homeowners who obtained subprime loans, this will be an easy requirement to meet, but for those families who made conservative housing choices with affordable payments and then ran into a financial setback like a job loss or unexpected expenses, this requirement could prevent them from obtaining assistance, as they did too well of a job of managing their finances.

But there are other requirements related to income that are not determined by a simple calculation, and the subjectivity of some of these throws the entire purpose of the bill into question. Bureaucrats whose income and job longevity depend on the federal budget money flowing into their department may decide that it is better to cut expenses as close to the bone as possible, making decisions that result in their keeping the appropriated money instead of helping homeowners.

For instance, homeowners must prove that they can no longer make the payments on the loan as it is currently structured. They may be on time now or in default of the mortgage, but they must prove to the regulators that they are not applying for federal assistance just to receive a lower monthly payment. Of course, anyone applying for help is seeking lower monthly payments to prevent foreclosure, and it will be up to the self-interested bureaucrats to determine if they are able to make the regular loan payment.

Also, any second mortgage or home equity line of credit on the house would have to be paid off or removed from somehow before the FHA would agree to refinance the foreclosed property. The owners would not be able to obtain any new second mortgage except for necessary upkeep purposes for five years. With many of the subprime mortgage having been originated with a second mortgage to begin with (80/20 loans), this requirement will effectively lock thousands of families out of receiving federal assistance.

As with many of the federal programs designed to provide foreclosure help to homeowners, participation in the Foreclosure Prevention Act is entirely voluntary for lenders and will require mortgage companies to give major concessions in order to unload these foreclosed properties onto the government. It is inconceivable that many lenders will agree to these demands, moving forward with the foreclosure instead.

The main requirement lenders may balk at is that loans must be marked down to 90 loan-to-value (LTV) on a house two years ago which may now be at 115 to the FHA a fee of 3% of the outstanding mortgage principal to have the privilege of dumping the loan onto the government. Depending on the size of the mortgage, it may cost far less in legal fees and other charges just to continue foreclosing.

Difficult requirements for homeowners to meet and onerous ones for lenders virtually guarantee the failure of government programs such as the Foreclosure Prevention Act of 2008. Its track record thus far has compared to the other plans like Hope Now and Project Lifeline in falling short of expectations to provide help to families in obtaining federally-guaranteed loans or qualifying for a reasonable mortgage modification. But it is just as inconceivable that the government will admit its programs actually encourage more foreclosures, as they will most likely be continued indefinitely, providing all the assistance of a parasite as they take money from citizens in order not to give it to needy homeowners.