Government "Bail-outs" usually fail !

Debt forgiveness a rarityFew bankers will willingly do that, attests Michelle Lewis, president of Northwest Counseling Service, an agency in Philadelphia that helps homeowners who are in danger of foreclosure. She says she's all for negotiating debt forgiveness. "And that's been something we've been working on for years -- but we have had no success," Lewis says.
She adds that, "occasionally, on a case-by-case basis," clients have had debt forgiven, but only after filing lawsuits.

There's no incentive for mortgage servicers to approve short refis, she says, because servicers believe they lose less money by foreclosing than by forgiving debt. And they fear that debt forgiveness would bring out the scammers.

Debt forgiveness isn't scary, but foreclosure is, and the threat of it keeps homeowners in line. "While we're seeing mass foreclosures, many (borrowers) are paying under these terms that some would call onerous," Lewis says.
Government plan benefits fewIn December, the Treasury Department and HUD announced a plan to help homeowners with onerous loans, but not with debt forgiveness. The plan would aid the small number of people who could afford the introductory rates on their subprime adjustable-rate mortgages, but couldn't afford the higher payments after the rate jumped. Those people would have their introductory rates frozen for up to five years. A homeowner taking advantage of the rate-freeze plan will end up making payments on a house that's worth less than the loan amount. That's not necessarily in the homeowner's best interest. A borrower would pay less every month if some of the debt was forgiven and the loan balance (and monthly payment) reflected the home's market value.
When you look at it that way, mortgage investors fared quite well in the plan brokered by the secretaries of Treasury and Housing. The rate freeze is friendlier to Wall Street than it is to Elm Street.
"We've really got no bailout for consumers, except through individual litigation, which is costly, but the market gets all kinds of bailouts," Lewis says. "Every effort to correct this leaves the loan whole. All the measures to figure out what to do with the people who got these loans still pay the lender for the bad behavior. It's crazy."
In December, even as the Treasury and Housing secretaries pushed a rate freeze instead of debt forgiveness, the president signed a law, called the Mortgage Forgiveness Debt Relief Act, that cuts taxes on homeowners whose debt is forgiven.

"So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it's a really good piece of legislation," President Bush said. "The provision will increase the incentive for borrowers and lenders to work together to refinance loans -- and it will allow American families to secure lower mortgage payments without facing higher taxes."
Short refi in lieu of foreclosureThe law might give borrowers a tax break, but contrary to what the president says, it doesn't provide incentives for lenders to refinance with debt forgiveness instead of foreclosing. The law doesn't give lenders and mortgage servicers tax breaks or subsidies for approving short refis.
It's hard enough to get a short refi as it is. A homeowner has to be past due for demonstrable reasons, with few prospects for catching up by reducing expenses or increasing income. A foreclosure is the outcome of most such cases. Or the homeowner can surrender title and move out voluntarily in what is called a deed in lieu of foreclosure.
In other cases, the servicer might approve a short sale -- a sale of the house for less than the loan balance, with the remaining debt forgiven. Or, if the homeowner is persistent and lucky, a short refi might be arranged.
A short refi won't happen unless the homeowner is willing to undergo a financial review and permit an appraisal with inspections inside and out. All stakeholders -- the servicer, borrower, mortgage insurer and any lender extending a second mortgage -- would have to approve a deal, agreeing that a short refi would lose less money than other options.
For debt forgivenessLazerson believes there would be many instances in which a short refi could be demonstrated to be the best choice. He would commission two appraisals -- one for the home's fair market value and another for the home's "REO value," or real estate owned value -- what it could be expected to fetch in a quick sale after foreclosure. In neighborhoods with a lot of empty and foreclosed homes for sale, the REO value might be so much lower than the fair market value that the servicer would be willing to approve a short refi rather than foreclose.
He cites the work of Dan Immergluck, an associate professor of city and regional planning at Georgia Tech, who wrote a study concluding that each foreclosure knocks about 1 percent off the value of every house within an eighth of a mile. By that reckoning, a cluster of foreclosures can reduce surrounding home values enough to trigger more foreclosures.

Elizabeth Warren, a professor at Harvard Law School who is an expert on bankruptcy and consumer credit issues, says debt forgiveness "is our best shot for getting out of the mortgage crisis without destroying value through foreclosures. More foreclosures will only hurt the lenders and homeowners involved, they will also depress the real estate market for everyone else."
To Lazerson, it's a no-brainer: If foreclosures lead to more foreclosures, lenders should halt the snowball before it gains momentum by approving short refis.
"They just take the hit on the debt forgiveness, because they're going to take a hit anyway," Lazerson says. "In either case (foreclosure or short refi), they're going to take a loss."
Against debt forgivenessFrom a mortgage servicer's perspective, a request for a short refi might sound like extortion, as if the borrower were saying, "Forgive some of the debt that I willingly took on, or I'll stop making payments altogether."
"It almost encourages everyone to say, 'Hey, maybe I'll stop making payments for a few months and the lender will refinance me,'" says Neil Garfinkel, partner in charge of real estate services for the New York-based law firm Abrams Garfinkel Margolis Bergson. "How do you prove that someone's just not gaming the system?"
That's the same question that Bitton has. It's why she has reservations about the rate-freeze plan, too.
"It's almost encouraged people to be late on their mortgages," she says.
Garfinkel's and Bitton's reservations are about moral hazard: The idea that people act recklessly if they are insulated from the consequences of their actions. Lazerson replies that moral hazard applies not only to borrowers, but to lenders, too.
"What about the moral hazard that they caused in the first place, by offering these loans for people who had no business being homeowners?" he says. "The lenders were just counting their money and they really created this whole thing. Had they not offered these loans, you wouldn't have to be choosing which borrowers are deserving or not deserving."

Waiting on Congress
However, I’m not sure anything will be done soon enough to help your situation. As you probably know, to a large extent the president’s hands are tied because, while he can make recommendations, it’s up to Congress to make the changes happen by passing new laws.
Although the House of Representatives overwhelmingly passed Bush’s “FHA Modernization” more than a year ago, the bill was loaded down with so many other “add-ons” (read: spending for unrelated special projects in various Congressional districts) that it was never signed into law.
When "Loss" = "Income"
The president is also asking Congress to temporarily change the tax code to provide relief to homeowners forced to sell homes at a loss — due to the fact that real estate values have gone down, even though their mortgage payments have gone up.
As the law stands today, if a lender cancels a debt you owe for less than the outstanding loan balance, the forgiven amount is considered “income.” Even though the borrower doesn’t receive any money, he/she still has to pay income tax on this amount.
For instance, let’s say you paid $200,000 for your house and have a loan for $180,000. If you live in one of the areas where the decline in residential real estate has been especially severe, similar homes in your area might now be selling for $160,000.
Assume that in order to avoid foreclosure, your lender agrees to release you of your mortgage for less than the current balance of $178,000. You sell the home, netting $158,000, which goes straight to your lender.
That additional $20,000 you owed the lender has been “forgiven,” and under the “cancellation of indebtedness” provision, this cancelled debt is now considered income. So when you file your income tax return next year, you would have to declare this $20,000 and, naturally, pay income tax on it.
Congress members have introduced several bills that would temporarily protect individuals from owing income tax on cancelled mortgage debt. Because President Bush also supports this idea, there’s a good chance legislation will eventually be enacted.
RE-financing Fairness
Over the coming months the Treasury Department will be reaching out to the FHA and private lenders, as well as community-based organizations such as Neighbor Works and 4divestdebt , a national nonprofit created by Congress to provide financial and hands-on support for community revitalization projects.
According to the White House, the goal of the collaboration is “to expand mortgage financing options, identify homeowners before they face hardships, help them understand their financing options, and allow them to find a mortgage that works for them.”
Federal banking regulators are also considering ways to strengthen the disclosure requirements that lenders must provide to borrowers. One problem here is that in recent years, more and more mortgages are issued by private lenders, (Countrywide Mortgage, for instance) and the laws that govern banks and saving and loans do not cover private firms.
Deciphering Loan Documents
As you unfortunately discovered, mortgage documents are dauntingly complex. They are filled with terminology laced with legal and financial jargon that is difficult for the average person to understand. To combat this, there are also initiatives that would require clearer language and better explanations in loan documents so that borrowers fully understand the consequences of what they’re getting into.
The fact of the matter is: While perhaps the vast majority of mortgage brokers are honest, well-meaning individuals, we’re only now beginning to learn how many crooks were also operating during the recent housing boom. Investigations are underway at both federal and state levels, especially in formerly “hot” mortgage markets such as California, Florida, Nevada and Colorado.
Megan Burns, a former bank loan officer, points out that there’s an inherent conflict of interest: Mortgage brokers get paid based on the number of loans they write. This means officers have an incentive to approve borderline borrowers for larger loans than they might realistically be able to afford and to omit inconvenient details, such as the fact that the interest rate could rise significantly.
“People rely on loan officers” to explain the terms of their mortgage agreement,” says Burns. “But how can you when their income depends on them closing a loan?”
Sure, all of the details are disclosed in the obtusely-worded, 30+ page, loan document and may be explained verbally at the closing, but by then she says, “people feel pressured to sign because they could lose the house.”
Did I Hear Someone Say "Fraud"?
“Toxic mortgages,” that’s what Randy Johnson, a 27-year veteran of the mortgage business, calls these loans. From his location in Southern California, Johnson has seen some of the most egregious cases of mortgage brokers approving any loan they can just to make a buck.
“They put people in a $1,000/month mortgage with re-set characteristics that increase it down the road to $2,000 and don’t help borrowers understand that. It’s a prescription for disaster.”
Moreover, mortgage brokers receive a bigger payout based on the size of the loan and the terms. Johnson alleges that even “A-rated” borrowers who could have qualified for “a 30-year fixed at 6 percent” were sold subprime loans, the kind that “start at 6 percent for 2-3 years, then jump to 9 percent and bite you in the butt down the road.”
The sole reason, according to Johnson, is that mortgage brokers “made more than twice as much money for making a subprime loan than an A-paper loan.” He thinks the government “ought to devote a lot of energy to help people who have taken a great leap; to get good citizens to stay in their homes.”
He says the proposals to temporarily bail out these borrowers will “give people breathing room, allowing them to build up some equity.”
Borrowing Smarts
Johnson has written books to try and educate consumers about being smarter when shopping for a mortgage. Burns, who got “frustrated” with the mortgage business because she refused to adopt the deceptive tactics of many of her competitors, quit to launch a Web: www.guaranteedloanhelp.com
According to Burns, “most of the site is free for consumers.” After you’ve received a loan proposal, you can go to the site and set up an account based on your email address. Don’t worry, you’re not required to provide any sensitive information such as Social Security numbers or income.
The site then e-mails a questionnaire to your loan officer or mortgage broker. “We ask them more than what’s required to be disclosed by federal law,” says Burns. “It’s everything borrowers should know, but aren’t being told.”
When the questionnaire comes back, you’ll know, for instance, whether there is a pre-payment penalty, if your interest rate can increase and whether it’s capped at a certain amount. In addition, there are clear explanations of what the various terms mean.
By submitting a questionnaire for several different loan proposals, you can do an “apples-to-apples” comparison. You may find out that the loan with the lowest interest rate isn’t such a good deal, after all.
Don't Delay... Start by contacting your mortgage company as soon as possible and explain your situation. They might be willing to give you a new loan with more manageable terms.
But don’t stop there. You’ll also want to get at least one or two re-financing proposals from others lenders. Also visit the link below for more news.

www.guaranteedloanhelp.com