Meltdown 101: How a Mortgage Aid Plan Might Work
The government, facing a housing crisis that’s escalated far beyond all but the most dire predictions, is looking at ways to spend at least $50 billion to make sure borrowers can stay in their homes.
President Barack Obama is scheduled to announce a sweeping initiative on Feb 18 in a speech in Arizona, one of the nation’s most severe hot spots for foreclosures. Details of the government’s plan are not yet ready, but there is already plenty of chatter in the nation’s capital about how it might work.
Here are some questions and answers about the plan that’s coming together.
Q: How might the government’s plan work?
A: The plan is likely to feature hefty incentive payments designed to encourage the lending industry to lower mortgage rates or reduce the total principal amount owed by borrowers, a Democratic Senate aide briefed on the plan said Friday. The idea is believed to be attractive because it is expected to be far less expensive than having the government buy up troubled loans, which are often combined and divided into mortgage-linked securities that are owned by investors.
It was unclear, however, whether those government subsidies would be paid up front to companies that collect mortgage payments, or whether they would stretch out over several years. Those companies, known as loan servicers, have been roundly criticized for not being equipped for a massive surge in defaults and foreclosures.
Q: How big is the problem?
A: Over the past two years, foreclosures have skyrocketed. More than 2.3 million homeowners faced foreclosure proceedings last year, up more than 80 percent increase from 2007, and analysts say that number could soar as high as 10 million in the coming years, depending on the severity of the recession.
Q: Why haven’t earlier efforts to fix the problem worked?
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