A Government Mandated Foreclosure Moratorium?

This is a possibility, amongst many others, being considered by Congress looking for a way to stem the tide of foreclosures nationwide. While it sounds like a good idea on the surface it may be impossible due to the complexity of the mortgage industry and its multi-tier hierarchy.

Holden Lewis of Bankrate.com writes in an article released today:

"The high number of new foreclosures hints that the foreclosure problem will get worse, and members of Congress are looking for fixes."

'"There are no easy market solutions,"' David Berenbaum, executive vice president of the National Community Reinvestment Coalition, told the committee. He suggested a government solution instead: a mandated temporary halt in foreclosures. Too many law firms and mortgage servicers rush consumers into foreclosure without assessing their ability refinance or catch up on their payments, he said."

"Moratorium would raise questions

There were no servicers at the witness table to critique the notion of a national foreclosure freeze. A mortgage servicer might have asked who would pay the accumulated interest payments during a moratorium. For example, if a six-month halt to all foreclosures merely delayed a consumer's foreclosure for six months instead of preventing it, that homeowner would rack up seven months of unpaid interest charges instead of one month. Who would be responsible for paying the extra amount: the servicer, the investors who own the loan, the borrower? If it's the latter, is that fair? Or would the taxpayers pick up the tab?

Proponents of a foreclosure moratorium say it would give borrowers time to refinance if possible, and would give servicers time to modify loans. Mortgages can be modified in different ways: The interest rate can be reduced, payments can be suspended until the borrower finds a job, or missed payments can be caught up over time or tacked onto the end of the loan."

Complicating things further is the fact that many loans are sold after closing - releasing the original lender from any obligation or authority to modify terms.

"Most mortgages are sold to an issuer, which packages loans into pools with hundreds or thousands of loans with similar terms, rates and credit quality. Each pool of loans is securitized, meaning that bonds backed by the loans are sold to investors. The investors don't own whole loans, they hold interests in the entire pool of loans.

When mortgages are securitized, they are chopped up and thoroughly mixed together. Modifying a loan in a securitized pool is like extracting a teaspoon of sugar from cupcake batter.
"Once the lender has sold the mortgage to the issuer, the lender no longer has the power to restructure the loan or make other accommodations for its borrower," Bair said. That power resides with the servicer, but "the servicer can only do what the securitization documents allow it to do.

Oftentimes, those contracts make it nearly impossible to modify more than 5 percent of the loans in the pool. Loans can't be modified until the borrower is at least a month past due. Tax laws and accounting rules"

It is clear that there are NO easy answers... yet. If you are in danger of foreclosure you cannot afford to wait for Congress to act. You need to take matters into your own hands. You can take the first step by going here.

-Bill Burniece