Feb 19, 2008

Project Lifeline: Too Little Too Late

On February 12, 2008, a consortium of mortgage lenders trotted out a voluntary program purportedly designed to help prevent foreclosures. Under this program, termed Project Lifeline, lenders will give homeowners who are still in their homes some additional time to work things out before foreclosure proceedings are initiated.

Here's how it works. If you are 90 or more days delinquent on your payments, and foreclosure or bankruptcy proceedings haven't yet been started, the lender will give you a 30-day written notice prior to initiating foreclosure proceedings. The notice will invite you to contact the company servicing the mortgage for a possible resolution. If agreement isn't reached within that 30-day period, the foreclosure can begin.

On the surface, this looks like a good thing. Homeowners who fall behind sometimes get fatalistic and don't bother to attempt a resolution. This 30-day notice may stimulate you to give it one more try. It also gives you an extra month without paying if you are ultimately going to lose the home. Every month you can live in a home "rent free" is an opportunity to put some money aside for moving expenses and other costs associated with finding new shelter.

The downside of this new plan? If you are busy negotiating with the lender and the negotiations don't produce anything useful, you may have foregone a more appropriate action for your individual circumstances, such as filing for bankruptcy, passing up an opportunity for new shelter, or even hunting for refinancing on your own.

Don't let time run out. Although the major lenders may say they want to work things out with their borrowers, the truth is that many homeowners have been forced into a kind of rope-a-dope (a la Muhammad Ali) where the lender implied that relief was just around the corner, only to deliver a knockout punch by cutting off communications on the eve of the foreclosure sale. This 30-day notice appears to be more of the same, rather than a new policy that might substantially cut down on foreclosures.

Project Lifeline assumes you can trust the folks throwing the rope, even thought they're the same folks who put you into the water in the first place.

When negotiating with a bank or other entity to avoid foreclosure, it's important to remember that you're most likely not negotiating with the decision-maker -- the owner of the mortgage. An important component of the housing bubble is that mortgages were packaged for easy sale on Wall Street and in international markets. To give you true relief with a substantially reduced interest rate or adding your missed payments to the end of the mortgage, the mortgage owner has to give permission. An investor in China or Germany may not be as accommodating as their American counterparts would like them to be, and while it may make sense for a lender to avoid foreclosing, the relationship between the lender and its investors may favor the foreclosure.

So, if you get one of the 30-day notices, feel free to explore possible workouts, but keep an eye on the clock, and if you are in one of the many states that provides very little advance notice for a foreclosure, have a solid Plan B ready and waiting.