Today, President Barack Obama is expected to unveil a new "carrot-and-stick" approach to get banks and other lenders to better address soaring nationwide home foreclosures.
The plan He’s expected to announce will be to use $50 billion or more in Wall Street rescue money authorized last year, to provide subsidies for when banks reduce interest rates to lower the monthly payments for many Americans (who got into bad loans they did not understand or have lost their jobs due to the current bad economy ) who are now struggling to pay.
The plan, (to subsidize banks) which has yet to be formally announced, would serve as the carrot for banks to help homeowners stay in their homes and halt foreclosures, so there would not only be help to stop the losses for individuals and the banks, but also stop the foreclosures from dragging down the values of nearby homes.
The prevoius vountary efforts during the bush administration_Hope for homeowners and the federal Housing Administration’s FHA Secure that the banks joined have resulted in relatively few mortgage modifications.
Now the stick part, of the Carrot and stick approach is they will have a stick waved at them if they don’t comply with the subsidy plan. It will come in the form of Obama’s support for legislation pending in Congress that would allow bankruptcy court judges to modify the terms of a mortgage.
Right now that is forbidden, and banks and other lending institutions fiercely oppose what they call "cram down" legislation, saying that it willl bring uncertainty for lenders, who will respond by restricting mortgage lending.
If passed, it will mean that banks will have to soon choose between the lesser of two evils. They could either modify loans (with a subsidy) to provide lower lending rates, and lose what they might have made from the higher lending rate over the life of the loan. Or they can do nothing and a homeowner could file for bankruptcy and then have a judge order new loan terms that allow the borrower to stay in the home, and pay the lender less money.
The Obama administration isn’t providing details, but it promises a serious new approach.
"Ten thousand people face foreclosure every day in this country. And it’s a problem that not only affects the individual homeowner and their family, but oftentimes has a direct impact to home values in the neighborhood that that house or homes are on," White House spokesman Robert Gibbs said on Tuesday. "This is a tremendously important part of what the president believes has to be done next in order to move our economy forward."
More than 2.3 million mortgages entered foreclosure proceedings last year, and by year’s end almost one in 10 mortgages in the U.S. were either delinquent or in foreclosure. Some prominent economists such as Harvard University’s Martin Feldstein think that one in five homes nationwide is worth less than the mortgage that was arranged to purchase
