Wednesday, February 13, 2008

Project Lifeline: A Pause Without a Cause

Yesterday six of the seven largest home loan servicers announced their participation in Project Lifeline, a plan organized by President Bush. Treasury Secretary Henry Paulson described it as "a targeted outreach to homeowners' 90-days or more delinquent that may lead to a "pause" in the foreclosure process." I wrote about the plan announced last year known as Hope Now in which servicers agreed to freeze interest rates for qualifed subprime mortgages, presumably to give homeowners time to refinance or workout their defaults. Project Lifeline offers mortgage borrowers a thirty day pause in a foreclosure process and breathing space to contact their lender and modify the terms of their mortgage by negotiation. Paulson urged all the servicers who participated in Hope Now to volunteer for Project Lifeline too.

The group entitled to relief under Project Lifeline is larger than that covered under Hope Now. People who are 90 days or more delinquent on their mortgage payments are eligible for the 30 day pause in the foreclosure process. Hope Now's rate freeze relief was limited to some holders of subprime mortgages. Project Lifeline includes holders of prime and home equity loans, not just a subset of subprime products.

Borrowers 90 days or more delinquent on their mortgage payments likely are already in the process of losing their homes to foreclosure. Paulson speculated on why homeowners in this group have not already sought a modification of their loans. "Perhaps they are hoping to find a way to get current on their mortgage payments, or perhaps they don't think any solution is possible. For whatever reason they have not yet taken action; our hope is that today's announcement will reach them, and they will reach out immediately for help – especially now that the foreclosure process is upon them."

The idea that a 30 day pause in foreclosure activity will make a significant difference to people who are already three months late on their mortgage payments seems farfetched. Borrowers might have been confused about the terms of their mortgage at closing. The consequence of default is not confusing. Borrowers plainly understand that if they don't make mortgage payments, the lender will take their house. Those with income to make payments and equity in the home already have incentive to bargain for a modification. Homeowners who have no equity in their homes (because they didn't make a down payment or they did but their home value sunk below their mortgage obligation when the housing bubble burst) will walk away from their home and their mortage. The pause will be wasted on them.

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