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.