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Foreclosure Freeze – Project Lifeline

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Yesterday, Project Lifeline was unveiled. Project Lifeline is a White House backed plan that calls for six of the nation’s largest mortgage lenders to voluntarily contact homeowners who are 90 days or more behind on their mortgage payments, and possibly grant a 30-day “pause” in the foreclosure process so a favorable solution can be reached.

This is in an effort to help borrowers regain their financial footing and possibly find a way to keep their home. It can also benefit the lenders because foreclosure proceedings are time consuming and extremely expensive. The six lenders, Bank of America, Citigroup, Countrywide Financial, J.P. Morgan Chase & Co., Washington Mutual, and Wells Fargo, account for almost half of all U.S. mortgages.

Why is the government supporting Project Lifeline?

Right now, the economy is not going very well. The government doesn’t want to admit it, but we are in a recession and there is no immediate cure. The economic stimulus package is designed to pump money into our lagging economy, but no one knows if it will be enough to affect a positive change. My guess is it won’t be enough.

Adding more foreclosed houses to the real estate market can possibly depress the economy further by causing a glut of houses on the market. This could drive real estate prices lower than current levels and extend the recession.

Who Project Lifeline is aimed toward

Several months ago the government sponsored subprime mortgage bailouts to varying degrees of success. Project Lifeline differs as it is designed to assist anyone with a mortgage, sub-prime or not. This includes a primary mortgage, second mortgage, home equity line of credit, or other liens or lines of credit against their residence.

This only applies to a primary residence, and not to vacant or investment properties. The government’s hope is that lenders are willing to work with borrowers to restructure loans and reduce the number of new foreclosures.

How Project Lifeline works

The six lenders will contact homeowners more than 90 days overdue on their payments and ask them to call a number. Then, the homeowner has to state they want to keep their house.

At this point, the lenders will request up to date information about the borrower’s income levels, debt to income ratio (DTI), and other financial data. Then the lenders may offer the homeowners financial counseling or to restructure their loan. Note: loan restructuring is not automatic.

Who wins, who loses?

The winners: For those situations where Project Lifeline actually leads to someone staying in their home, then both the lender and the homeowner win. The foreclosure process is expensive for banks, and most of them have no desire to have residential property listed among their liabilities as it ties up their cash flow. Homeowners will be winners if this lets them get some financial counseling and possibly renegotiate their mortgage. On a broader scale, this could help the economy by preventing many home foreclosures, which would help prop up real estate prices.

The losers: Anything that says “backed by the White House” means you, and I, and every other taxpayer is footing a portion of this bill. Project Lifeline will probably cost taxpayers a lot of money. However, it may be worthwhile depending on its economic effects.

Some people have already lost. In many real estate markets, houses have depreciated to a value less than the outstanding mortgage. It is becoming much more common for people to walk away from their mortgage because they owe more than the house is worth. In cases such as these, there are no winners.

Will Project Lifeline work?

In certain instances, I think it will. I am sure there will be homeowners who will be able to keep their homes due to this program. But will it fix the economy or the sub-prime debacle? No. Those problems are too complex and too far along to be aided very much by a program like this. This may help individuals and to some extent the participating lenders… but it won’t stop a recession or declining real estate prices.

Project Lifeline seems like a noble cause, but it may or may not work as it is intended.


Published or updated October 12, 2008.
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{ 12 comments… read them below or add one }

1 fathersez

We are luckier in our part of the world.

Banks usually take a much longer time than 3 months to call forclosure.

Like you said, it is expensive for a bank to foreclose and it would make financial sense for them to work out something mutually acceptable with the borrowers.

It is usually a real hard core case that goes all the way to foreclosure.

(Having said that, we have never really gone through a period of residential property exuberance like what the US has gone through.)

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2 Ron@TheWisdomJournal

It’s going to be interesting to see if GDP numbers are adjusted downward so we can know for sure if we really are in a recession or are in a media driven downturn.

If I were a banker again (I was at one time), I know I would much prefer to have someone living in a house than to have it sitting empty. Banks should come to some sort of agreement to suspend payments, or accept half payments, or something creative to prevent their balance sheets from being flooded by real estate. This should come from the private sector, though, not the government. If you get the feds involved, they will inevitably mess it up.

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3 David

Thanks for the mention, Ryan!

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4 Kirk

I hate to be a humbug, but I think this will be useless. It is another example of the government being able to claim they are helping the homeowner.

As Ryan points out, the restructuring is not guaranteed. These folks need to qualify for the new loan, which most will not be able to for a couple reasons.

One, it was estimated almost 70% of these subprime and Alt-A loans were liar loans. These folks grossly overestimated their income in order to get the home. When the bank finally does some due dilligence, they will see that these folks can’t really afford the home they bought.

Two, the press talks about how people are losing their homes due to the resetting of payments for the exploding ARMs. In actuality, most folks have defaulted before the reset took place. This means they flat out cannot afford the home. If they default during the teaser rate, then they have no chance to make it even with a fixed 30 year rate.

Three, it isn’t just the bank holding the loan. These are securitized instruments with investors who expect payment. The bank sold these instruments to investors (and made a pretty penny, mind you) so they have to take these folks into consideration. They can’t just take a smaller payment without facing a lawsuit (and rightly so).

If these type of programs are successful in keeping people in their homes with modified rates or payments, it will only hurt the real estate market, not help it. You will not find any buyers of securitized mortgages ever again. What investor would buy something where the government can step in and say you aren’t getting paid. No one. That is why third world countries have so much trouble garnering foreign investment. Also, the banks will charge higher rates to new borrowers because they will demand a higher payment to guard against the risk of being forced to give a free ride to a homeowner who made a bad mistake.

So while the Bush administration is patting themselves on the back, we need to realize this will probably have a small positive, but it could have a big negative in the form of unintended consequences.

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5 American Dividend Investor

I tend to agree with the above posters. This plan is simply going to delay the inevitable. If the homeowners can’t afford the mortgage this month why will they be able to afford them in 2 months?

American Dividend Investor.

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6 Ryan

fathersez, I’m sure foreclosures hurting banks is a universal truth!

Ron, I agree with your statement that government involvement usually screws things up somehow. I believe this may help isolated individuals, but as a whole will not change the course of our current economic situation.

Kirk, Very thorough response! I tend to agree with many of your statements. This program may help some people, but overall, I don’t see how it will be a benefit (other than the media presenting it in favorable terms). It is an election year, and the economy is doing poorly. In my opinion, these kinds of programs are a result of political posturing and little substance.

American Dividend Investor, “This plan is simply going to delay the inevitable.” Well stated. This may help certain individuals, but on a macro level, I doubt it has much effect.

Thanks for the comments! :)

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7 FFB

Kinda seems like the government is artificially keeping up the price of homes. In many areas home prices have fallen but still not to a reasonable level. I’m not saying I want people kicked out of their homes but sometimes you have to let the system fail in order for it to correct itself. And it would correct itself given the chance.

Here I sit, we haven’t bought a home because they are too expensive and the government is helping keep the prices up!

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8 foreclosurefish

I think you’re right about this. Not only are average people not going to benefit from this program, they are even going to have to foot the bill for Congress to come up with and draft up and discuss voluntary programs. If the programs are voluntary, why are our lawmakers working on them? Banks and homeowners come to voluntary agreements on solutions to foreclosure every day without government intervention.

And nothing that the government does has the results that it intended. Or at least it won’t have the publicly stated results that are intended. What the banks and government (or am I being redundant?) are really considering with this Project Lifeline isn’t exactly clear yet.

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9 Ryan

foreclosurefish, I have a feeling this is a political move in an election year. You bring up a good point that financial institutions can voluntarily do this anytime they wish. Why they haven’t is anyone’s guess. But now that there is a financial incentive backed by the government, it makes more sense for them to do so. I’m sure there is some form of kickback or tax break involved for the financial institution. Of course, the news channels neglected to talk about that! ;)

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10 Adfecto

Band aide for a bullet hole. However, that doesn’t mean the government should even be TRYING to fix the problem. Unfortunately for some, the free market needs to be allowed to punish both the borrowers and the lenders. On the books already are a series of laws that cover foreclosure (mostly at the state level). Maybe a few states need to get on the ball to bring their laws up to the level of most of the country but I see no place for Congress in this matter.

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11 Ryan

Adfecto, Good points. I’m not sure this is going to be a good thing for our country overall. I think it may help a few on an individual basis, but it won’t have that much impact on the economy as a whole.

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12 Fred

Lets not bail out homeowners, let them give their houses back to the bank, let house prices fall 80% to allow vultures to buy. If you would had bought in ’05 you wouldn’t think like that. Then allow banks file bankruptcy and investors to loose all their money. Real state then will probably be worth only to rich foreigners.
Now government should not get involved in this problem because first it is way too late, in ‘06 may be would have worked and second tax payer prefer spend their money in wars and helping other countries rather than helping ourselves. We are humans.
The only way to fix this housing problem, as Sen. Chuck Schumer and others stated, is for lenders to cut down on the borrowers’ debt. The rest extends the agony. After all, both lenders and borrowers are high-risk investors looking for high returns. Now is time for both to compromise before loosing all and the economy take a perhaps forever dip or at the end of this tunnel wakeup controlled by our own enemies.

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