Freezing Mortgages or Freezing the Real Estate Market?

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Eli Tene, the President of I Short Sale, Inc., a leading nationwide loss mitigation service provider, believes that the mortgage freeze plan is just another sign that the administration does not have the necessary tools to deal with a crisis. "If the goal is to help distressed homeowners, the mortgage rate freeze is missing the target," says Tene.

The administration initiated a new plan to freeze introductory rates on subprime mortgages preventing them from resetting to higher rates for five years. However, there are some who believe that this plan focuses energy in the wrong direction.

Eli Tene, the President of I Short Sale, Inc., a leading nationwide loss mitigation service provider, believes that the freeze is just another sign that the administration does not have the necessary tools to deal with a crisis. "If the goal is to help distressed homeowners, the mortgage rate freeze is missing the target," says Tene.

Tene highlights four significant pitfalls in the plan that should be considered:

1. The plan is limited to loans made at the start of 2005 through July 30 of 2007, and will cover loans that had been scheduled to reset to higher rates between January 1, 2008 and July 31, 2010.

2. The plan targets only homeowners that are current in their mortgage payments. In other words, it ignores the growing number of homeowners who have already missed one or more payments. These homeowners continue to face foreclosure with no way out.

3. Freezing rates does not necessarily mean the rates will be low enough to allow the homeowner to stay current. Some mortgages have already adjusted and many of those who need to pay them cannot afford to do so.

4. The sheer notion that the housing market prices will increase, thus allowing homeowners to refinance their current adjustable rate mortgages does not hold water. On the contrary, the mortgage freeze will just assist the lackluster performance of the real estate market and will now lock both the property owner and the lender for a longer period of time.

Tene is not alone in his criticism of the plan. Hillary Rodham Clinton and John Edwards, complained that given the risks to the economy, Bush's proposal is too limited. The two Democratic presidential contenders put forward plans to freeze mortgage payments as well as reduce further foreclosures. Tene agrees with their proposed initiative stating, "there must be pressure on lenders to negotiate with homeowners."

Tene also suggested that lenders should be directed to the solution that can keep the market in motion. "It is extremely important to minimize losses for the lender, giving them the chance to maximize their recovery," says Tene. "At the same time, we must remember that the focus should remain on the homeowners. We must provide serious alternatives to set homeowners free from loans they cannot afford."

"The government was always proud of successful programs encouraging homeownership. Now homeowners that are in default, or those that cannot qualify, under the new aggressive legislation are left out. The call for full documents will simply leave these borrowers "flushed down with the water". This plan deceives the people and gives the impression that the government is actually doing something. Very quickly we will all recognize that it is simply just a band-aid."

Tene suggests a few alternatives for win-win solutions for both the property owner and the lender but, "when it comes to the bottom line, the only true solution that solves the root cause of the problem is a short sale." According to Tene, more and more lenders understand the benefit of short sales and he believes that this is the most viable option. In short sale, the homeowner sells the property at the fair market value, even though it is less than their current debt owed on the property. The lender maximizes its recovery and achieves liquidity. The property owner erases the debt and minimizes damage to their credit score. More importantly, the homeowner gets a second chance to get involved in the real estate market, but in the right capacity.

For homeowners that can qualify to stay in their property, Tene suggests lighter tests to determine their financial qualifications going forward. He states that the modification work out must be made easier and include change of rate, change of balance, and change the maturity by adding 10 years.

Tene concludes, "It is clear to everyone that something must be done. It is important however to focus on realistic solutions that will minimize the damage this crisis will inflict on everyone."

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Shoham Nicolet
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