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July 6, 2008

Economy: Foreclosures Will Continue Even With New President

    The hopefulness that comes with a new president taking office can’t erase the subprime lending disaster and will not resuscitate homes values overnight — presidents have no direct ability to reduce rising mortgage rates.

Both Senators Barack Obama and John McCain promise help for homeowners facing foreclosure.

Obama calls for a broader role for government than McCain, but both candidates envision the Federal Housing Administration providing new, cheaper mortgages to distressed homeowners who otherwise would have difficulty refinancing into more secure government-insured loans with lower monthly payments.

For the plans to work, lenders would have to be willing to take a substantial loss by reducing the amount owed on the loan. Some lenders would have a powerful incentive to take the losses because a refinancing deal could allow them to recover far more money than they would get from the costly process of foreclosing on the property and trying to resell it.

The FHA piece of the Dodd plan would cost close to $1 billion and would help more people.  The funds would come from diverting money in the early years from an affordable housing fund financed by the profits of mortgage giants Fannie Mae and Freddie Mac.

McCain’s FHA provision is estimated to cost from $3 billion to $10 billion and would help less people.  The funds would come from either cutting government spending elsewhere or having the federal government borrow more.


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