New relief programs bring little hope to distressed borrowers

As the redistribution of wealth continues to march counter to convention, that is, from the middle class to the Wall Street baronage, rather than from the rich down, you have to wonder why. I'll put a good bit of the blame on Treasury Secretary Timothy Geithner. I hadn't up to now thought enough about him to garner an opinion until I read an interview he did not long ago with Newsweek. In it he reveals that, despite having spearheaded the bailout of the investment banks with billions in taxpayer funds, the same institutions which utterly wrecked the real estate market (and the economy in general) in the first place plundering trillions of dollars worth of homeowner equity the relief he proposed for distressed borrowers is ... as close to nothing as you can get. To wit:

"...[W]e are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people's basic sense of financial stability."

That's it? Cushion the fall? You've got to be kidding me. Feed the sense of stability? The cynicism and condescension of that boggles the mind.

At any rate, that's been the tenor of the policy from the Treasury Department which has attempted, poorly and nonchalantly, to cobble together a strategy to help homeowners, the second wave of which are not subprime borrowers but rather took out affordable loans and are now in trouble as a result of unemployment and lost income.

In sum, homeowners, you're on your own. Of course, this has been painfully apparent for some time. The HAMP program (Home Affordable Modification Program), overseen by the Treasury Department, has been a colossal failure. This one is the latest in a string of government-sponsored programs to induce banks to modify borrowers' awry loans, none of which have been at all efficacious. You see, when Geithner was shoveling hundreds of billions of dollars into the Wall Street trough, he didn't bother to think maybe a string to attach to the bailout, say a requirement that would have forced banks to modify a certain number of home loans, would be a good idea. Instead we got, "Be nice to the borrowers, banks." But they haven't been, by the longest shot.

Under HAMP, $75 billion was set aside to bribe the banks to help borrowers. Unfortunately, banks are not accepting the bribes in droves. There are constantly roughly 2 million homes in the maw of foreclosure. The number of foreclosures since the market imploded is in the several millions. Since HAMP was enacted the number of permanent modifications that have been approved is, maybe, 300,000.

Most recently, in recognition of HAMP's uselessness, the government shifted its effort from attempting to help distressed borrowers, to steering them towards giving up the fight: HAFA encourages them to short sell their homes, paying them up to $3,000 to do so. What it lacks in originality it should make up for in inevitable failure.

For one, short sales have proved to be unwieldy and difficult to close. For another, banks have been paying borrowers to move from their homes in exchange for leaving the drywall on the studs for quite some time already. What's more, a homeowner may be better off being foreclosed than electing an alternative, i.e., a short sale or a deed in lieu of foreclosure. Why? IRS reform exempts the borrower on her principal residence from tax liability on the debt "forgiven" by the bank (which previously was considered ordinary income and taxed as such). On the other hand, the deficiency amount forgiven in the context of a short sale or deed in lieu is not necessarily exempt (this is an intricate questions for a CPA, keep in mind, and I'm not a CPA; moreover, I've gotten a different answer from every accountant/tax preparer I've posed the question to).

Then too, as the banks have been reserving their right to sue for the deficiency resulting from a short sale or deed in lieu of foreclosure, you've just extended its period of time to recover the loss from six months (in the case of foreclosure) to six years (for breach of a written contract). HAFA does require the bank to fully release the borrower from future liability, but my sense is that this program is more of the same and the banks, servicers and investors aren't going to jump on board.

Now, what of the Treasury Department's new push for reduction of principal loan balances? First, it should have been done long ago. It's a flat fact known to anybody who's been keeping up that the only way to stem the historic rate of foreclosures is through principal reductions. Homeowners who are severely under water are more likely to surrender to foreclosure than otherwise, and why not? If equity is never accrued, or there is little chance it will in your lifetime, what's the point of owning a home that you will be renting from the bank until you die?

Geithner, until now, discouraged principal reductions, only supporting the lowering of interest rates, which has been in abject vain.

Remember, though tweaked, this is still the HAMP program (only expanded) which, since its inception, has only modified an abysmally small percentage of problem loans. Why anybody would believe that the banks are all of a sudden going to become alacritous and help enough distressed borrowers to make any difference at all rather escapes me.

Michael Radmilovich has been a practitioner of real estate law in Reno since 1990. Contact him at 771-4958.