Mortgage Aid Package Debated

The U.S. Treasury announced yesterday that its mortgage assistance initiative helped 45,000 distressed subprime homeowners get new loans in its first month, but critics say that many of them have not received long-term relief and may even end up facing higher total costs. There is concern among experts that these efforts may just be repeating the previous problem- creating a temporary teaser rate in hopes that things will get better in the future.

The borrowers fall into two groups: The first group stands to benefit from temporary reductions in their interest rates while the second group will be given loans that just allow them more time to pay back their debts but face additional charges and late fees for missing payments. Very few borrowers under the program will actually see their mortgage principal reduced outright, which is the ultimate goal behind the regulatory push and the focus of recent comments by Ben Bernanke.

The fact is that financial firms have resisted offering generous loan modifications because they have to consider the returns of the investors who buy mortgages and provide the crucial financial backing for the loans. Regulators fail to understand that to upset these investors is to upset the financial backing behind the single largest market in the United States - the mortgage market - and that could be far worse than what we are seeing right now.

Popularity: 15% [?]