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Columnist Calls for Government to Radically Change Foreclosure Prevention Program

December 14, 2009

Our West Covina loan modification attorneys have long believed that the federal government's Home Affordable Modification Program needs radical changes to be effective. So we were pleased to see a Dec. 6 Fair Game column in the New York Times outlining specific changes that author Gretchen Morgenson recommends. Morgenson pointed out that even the Treasury Department, which administers HAMP, acknowledges that "banks are not doing a good enough job," and that foreclosures have not abated. To fix that, she argued, the government should address at least two major problems with the existing program, all of which were outlined in research by Laurie Goodman, head of mortgage strategy at Amherst Securities Group.

Goodman's research concluded that negative equity -- owing more on a mortgage than the home is worth -- is the driving force in mortgage defaults. This contradicts the conventional wisdom that unemployment is the most important factor. HAMP currently fails to take this into account. Another problem Goodman's research cited is the way HAMP calculates the payments that borrowers can afford, because it takes into account only payments, interest and taxes on the first mortgage. Other credit obligations, such as a car payment or credit card debt, don't count, which means the resulting payments may be too high or too low for the borrower's means.

Furthermore, holders of the first mortgages (the lenders, or in a securitized loan, the investors) may have their investments substantially reduced, while the values of second mortgages aren't touched. Because second liens tend to have higher interest rates, this means consumers with second liens aren't getting the help they need. Furthermore, the situation creates a conflict of interests for banks that hold the second liens but not the first, giving them an incentive to write down loans other people own. This is an especially serious problem because Goodman found that loan workouts with principal write-downs are far more likely to succeed than those that only adjust the interest. Her research also showed greater numbers of cramdowns when banks owned all the loans, suggesting that they do see the merit of cramdowns.

As Orange loan modification lawyers, we would be delighted to see Congress impose these rules. When we work with clients in financial distress, we always ask for the most complete financial picture possible, including all outstanding debt from any source. Omitting other debts makes no sense if the goal is to calculate what the borrower can afford. This may be even more true when dealing with second liens on the home, because second mortgages and home equity lines of credit directly affect the borrower's mortgage payments. Lenders with an interest in the second mortgage should not be in a position to make decisions that protect them from harm while hurting homeowners and investors. And if principal cramdowns offer the greatest chance of success -- as several studies have now shown -- perhaps the government should consider making them mandatory in cases that meet certain criteria -- or available during bankruptcy, as an incentive to consider them earlier.

Howard Law LLP has an active practice obtaining loan modifications on behalf of troubled borrowers. In many cases, our clients come to us after they have spent weeks or months fighting bureaucracy and indifference at their lenders, or after a miscommunication has put their homes in danger. Our Lakewood loan modification lawyers negotiate aggressively with lenders for lowered interest rates, changes to loan structures and even principal cramdowns in some cases. If we find evidence of predatory lending or other violations of our clients' rights, we can and will file lawsuits, a move that will ensure that we have the lender's attention. Whenever possible, we seek to keep our clients in their homes, with a mortgage payment reduced to a realistic, sustainable amount.

If you're in danger of foreclosure and you aren't getting anywhere on your own, you should call Howard Law for help. We offer free, confidential case evaluations, so you lose nothing by speaking to us about your rights and your options. To set up a meeting, you can call us toll-free at 1-800-872-5925 or contact us online.