Mortgage Rescue Plan: Damnation or Salvation?

For some troubled borrowers, the government’s new mortgage relief plan may look like salvation is at hand. For others, it may look like damnation. Either view could be right — or wrong, depending on how you decide to look at it.

The “Homeowner’s Affordability and Stability Plan” guidelines will not be made public until March 4th, but we already know many details. If your total monthly payment is over 38% of your income, the government plan will not compensate lenders for reducing your payment. Jumbo loans (those over $417,000 or $625,000 in some markets) will not qualify, nor will refinance amounts over 105% of the home’s current market value.

Many people are going to find that their loan simply will not fit into the government’s criteria. With that said, whether the actual plan helps you or not, is almost beside the point. Just the fact that the plan is being rolled out should prove to be helpful to many.

Lenders have been in a wait and see mood. They wanted to see what Washington was going to do for them – so they waited. Unfortunately, waiting to see their handout has effectively held burdened borrowers, as well as the entire economy, hostage. Now that that the plan is being unveiled; a problem solving mindset should be adopted.

Sadly, it has been these types of mindsets that cause the financial crisis in the first place. A crowd mentality has developed that looks to politicians first, to solve almost everything. Never mind the fact that it was almost 70 years of this type of thinking that is the real problem. If, however, we are to solve problems, we have to deal with the reality that is, not the one we wish for. As individuals, we each need to take control of our thinking and act in our own best interest. With this in mind, even a bad mortgage bailout plan can be advantageous to a lot of troubled borrowers, if they understand how. This is why choosing the right mortgage broker for you is very crucial. This will help you to ease your stress in dealing with all of your finances.

The government will use the proverbial carrot and stick to get lenders to work it out loan modifications for many troubled borrowers. For homeowners with loans that do not fit into the government guidelines, many will lenders will make concessions so that they do. They can, for example, reduce the loan amounts so that the payments are at the government required 38% of the borrower’s income. Then, the loan servicers can adjust them further to 31%, and be paid by the government for doing so.

There will be many loans that will not be able to conform to the government plan. While these borrowers may think they are out of luck, they may in fact be the luckiest. Many mortgage lenders, servicers, and investors have their very survival at stake and simply put, self preservation is a powerful motivator. It will not be enough for them to modify or otherwise workout those loans that the government deems worthy. The new problem solving mindset will carry over to the massive numbers of nonconforming loans. If lenders cannot salvage an equitable value, they will get nothing. If they do this too often, they will perish and as I said, self preservation is very powerful.

As the government’s plan continues to be rolled out, the mortgage holder mindsets should change from wait and see, to problem solving, baring any unforeseen  amp; unintended consequences. Unfortunately, when it comes to government cure-alls, those always seem to be in high supply.

Knowledge is the best antidote, especially if it is used properly. With the right mindset, many troubled borrowers can cure their mortgage problems. For those who lack the knowledge and/or skill to deal with the lenders themselves, enlisting a professional is strongly advised. This is especially true if, despite his best efforts, one feels like he is headed for damnation. Sometimes, getting another point of view is all that is needed to achieve salvation.