Which candidate’s plan would best ease the mortgage crisis?
McCain and Obama differ on solutions, which could echo FDR’s during the Great Depression.
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As for the roof over Smith’s head, it’s now worth roughly $475,000. That’s low compared with his $690,000 mortgage, but perhaps too high for a replacement loan insured by the Federal Housing Administration (FHA).Skip to next paragraph
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Smith might get more time to cut a deal with his lenders if Obama becomes president. His plan calls for a 90-day moratorium on foreclosures by those financial institutions getting federal bailouts. The idea is to give time for new loan modification programs to get up and running.
“I think it would be delaying the inevitable [unless] there would be help with the balance,” says Smith, who says his lender, GMAC Mortgage, “hasn’t been too flexible.”
He’s also considering bankruptcy. Under current law, a bankruptcy judge could rewrite the loan on his rental property but not his main home. Obama would change the law to give judges the ability to rewrite loans on primary homes, too – an idea McCain does not support.
That could help both Smith and Mr. Chavez, an insurance salesman in Stockton. Chavez will probably stop paying his mortgage next month, when his adjustable rate is set to jump from 8.75 percent to 12 percent – more than he can handle.
Just the threat of letting judges modify loans might motivate lenders to cut deals with folks like Chavez. But the idea has its downsides.“Our lenders are telling us that as soon as that proposal goes into law, interest rates would go up between 1.5 and 2 percentage points instantly,” says John Mechem, spokesman for the Mortgage Bankers Association (MBA).
“Someone has to pay for the [added] risk.”
It’s unclear if Chavez would qualify under McCain’s plan, which wouldn’t help borrowers who fudged their loan applications. Chavez admits his documents contain incorrect numbers regarding his ability to pay, but he says his broker inflated them without his knowledge.
Selling the car to pay the mortgage
For the time being, he has posted his Pontiac Grand Am for sale on Craigslist. The proceeds would buy him one more month. “If I can get through one month, maybe something will change then. You never know,” says the father of a 2-year-old. “It’s hard to sleep.”
Some housing experts sound just as uneasy. They worry that for all the talk about mortgage buyouts or modifications, no one knows how to do that yet.
Wall Street spliced and diced many of these bad loans and sold the pieces. Any given mortgage might have dozens of investors, any one of whom could sue the loan servicer for decisions they don’t like.
Loan modification programs so far have failed because they don’t address this paralysis of the loan servicers, says Susan Wachter, professor of financial management at the University of Pennsylvania’s Wharton School.