Submitted by: Mark Walters

Can distressed home owners expect a foreclosure rescue plan to save the day?

Glad you asked, because the Federal Deposit Insurance Corp has been working on just such a plan, It’s is designed to rescue between two and three million homeowners. By the time you read this the plan will probably have hit the street in some form.

The key element of the foreclosure rescue plan is to motivate banks to rework real estate loans rather than foreclosing on homes. Your generous government will remove the bank’s risk by providing a partial federal guarantee for any losses on all the modified mortgages that meet certain criteria.

Remember that $700 billion bailout fund? That’s right, the one that passes out a few million to any Wall Street firm that made money losing investments. Well the foreclosure rescue plan would use between $40 billion and $50 billion of that money to underwrite the rescue.

Couple this plan with the recent announcement by some of the United States’ major banks that they are halting real estate foreclosures and reworking many mortgage loans. All this should halt the slide in real estate values, right? Maybe not

Douglas Elmendorf is a real smart guy and former Clinton advisor. Good old Doug says, “Even an ambitious program of mortgage modifications will not prevent a further decline in house prices.”

“It might prevent an overshooting of house prices on the downside. But houses still look overvalued relative to people’s rents or incomes, and it’s going to be very difficult to sustain house prices at their current level.”

History has shown that any market must have a complete correction before it can begin moving to the up side, so it should come as no surprise that any attempt to keep home values artificially high will just postpone the inevitable and delay the eventual recovery.

The bad news is that foreclosure sales have continued to drive price declines and fueled an increase in sale transactions in key local markets across the nation and there is no sure end of foreclosures in sight.

The Federal Reserve reports that the nation’s troubled economy has scared the pants off of foreign and domestic banks. They further tightened access to mortgage credit recently. A survey of 55 domestic and 21 foreign banks indicated that the large majority of domestic banks reported tightening their lending standards on prime, nontraditional and subprime residential mortgages over the past three months.

Lending standards have even increased on prime mortgage loans. When it comes to prime mortgages about 70% of the banks tightened lending requirements. It should be no surprise that 90% of the banks tightened the screws on nontraditional mortgages.

Tighter lending standards generally lead to reduced borrowing, which explains why 50 percent of domestic lenders experienced weaker demand for prime residential mortgages. 70% even indicated weaker demand for nontraditional mortgage loans and jumbo loan products.

While lenders have been making it more difficult for potential home buyers to qualify for mortgage financing interest rates have been inching up. That’s a double whammy for home prices. If people can’t afford or qualify for a mortgage they can’t buy a home.

The final result is fewer buyers for an increasing number of homes for sale. Can those financial geniuses in Washington really come up with a foreclosure rescue plan that doesn’t do even more damage to what’s left of the free market? I wouldn’t bet on it.

About the Author: Mark Walters is a third generation real estate investor andis offering a Free copy of his big guide to finding private and

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