Large sections of the American economy are now suffering from inflation, the various effects of the mark-to-market economic principle and illiquid assets. For Americans, one of the more palpable effects of the financial crisis are properties being foreclosed due to rising loan interests and sometimes, even unemployment.
How bad is the situation? Quite bad, as one can see from the $700 billion allocated by the United States government to rescue mortgagors from absolute destruction.
How will the rescue package work?
What the United States government wants is to buy as many defaulted or problematic mortgages to save the properties from foreclosure and at the same time, maximize any kind of help from the homeowners themselves.
The homeowners would still be paying back the amount they owe, in full. However, they would be answerable to someone else by then. The authority figure here (the US Treasury) would be the one buffering the effects of the global financial crisis.
Are lenders helping stop the foreclosures, in any way?
The answer is both a yes and a no. Fortunately, lenders are still willing to alter certain parameters if the need arises, but if and only if the mortgagor shows capacity to pay at all. If not, the rate and the net amount owed remains, and what logically follows is the foreclosure of the property.
On a very basic level, what can the bail-out plan achieve?
Authority, especially the kind of authority that emanates from the United States government can and will be able to convince lenders to minimize foreclosures. Mortgages are not fixed contracts; lenders definitely have the capacity to alter these if they wanted to. In the spirit of “let’s not contribute to the financial meltdown” there just might be a chance that they would alter certain parameters so that mortgagors can breathe again.
Okay, how many are being threatened by foreclosure today?
According to recent statistics, more than 2 million mortgages are now delinquent, and the figure will rise exponentially if something is not done. Because defaulting happens every sixty days, there’s are thousands more that would be piled atop this “financial killing field”. After the sixty day mark, mortgagors become that much more nervous, because they are now counting down the days, not to the next regular payment, but for the coming foreclosure. 900,000 individuals have already lost their properties to foreclosure since last year.
How will loan modifications take place?
Federal programs have been initiated to aid homeowners who are in need of financial bailout. One program aims to help those who are using more than 30% of their monthly cash flow to pay for their loan.
Under this federal program, banks would be marking down loans to about 90%. Such a modification would be vital to homeowners, especially those residing in the state of California, where the mortgages have skyrocketed to the point that mortgages are now worth more than actual property values.
What should mortgagors do in the meantime?
Since the implementation of the bailout plan is still in its infancy, mortgagors are encouraged to talk to their lenders to see if the loans can now be modified or marked down.