Mortgage Help Programs Try to Attack Crisis

Regulators have made dramatic attempts to calm markets and put an end to the mortgage crisis. Unprecedented and drastic action have helped to some extent, but one course of action has not been exploited: mortgage help. Homeowners in trouble helped to usher in the crisis, and they might help us find a way out.

FDIC chief Shiela Bair has been a vocal proponent of mortgage help. She wants the practice of modifying mortgages and offering debt workout programs to increase somehow, but lenders aren't doing much of it on their own. Bank of America is modifying a large number of mortgages, but only as part of a settlement.

• FDIC Chief Favors Mortgage Help
• How Debt Workout Programs Work
• Bank of America Modifies Mortgages for Thousands

Meaningful mortgage help efforts face challenges: it's labor intensive to modify many mortgages, investors may have to agree to the action, and there's always the issue of moral hazard.

The FDIC is experimenting with ways to make mortgage help more powerful. They're using computer programs to evaluate loan modification candidates instead of looking at each borrower individually. They're still ironing out the wrinkles, but they hope to set an example that private lenders can follow.

One of their first strategies is to turn mortgages into 40 year fixed-rate mortgages. By lengthening the term of the mortgage, most borrowers see monthly payments decrease (try our Loan Amortization Calculator to see how this would work for you).

Further reading:

• FDIC Experiments with Mortgage Help