More on “Project Lifeline”

Well, project Lifeline was formally announced today by Treasury Department and the Department of Housing and Urban Development. As mentioned before, it halts for 30 days foreclosure proceedings for homeowners in default for over 90 days. The idea is to give homeowners and lenders some additional time to work out better loan terms.

It looks like so far it’s a pilot involving 6 of the largest players in the mortgage industry: Bank of America, Citigroup, Countrywide, JP Morgan, Washington Mutual and Wells Fargo. The hope here is that the rest of the lenders will follow suit. These 6 lenders have already been involved in the Hope Now alliance, an effort organized by the Bush administration, to keep subprime ARMs from resetting. The Hope Now alliance states that it helped 7.7% of 7.1 million subprime borrowers (or 545,000 borrowers) during the back half of 2007. This was done through permanent loan modifications (such as lower interest rates) and negotiation of repayment plans.

Unlike Hope Now, Project Lifeline addresses all mortgages, not only subprime. Project Lifeline does not apply to vacant properties, investment properties, or homeowners in bankruptcy proceedings or facing a foreclosure date within 30 days.

So the whole thing makes me wonder: If this actually a viable solution or is this a “photo op” for our politicians? After all, perception is everything, especially in this election season. And we are, after all, headed towards a recession… So it’s important to at least look like we are doing something.

Project Lifeline just may be a logistical nightmare for the lenders. How will they handle all these homeowners calling them over the next 30 days? And how will anything actually get resolved in 30 days? Borrowers and investors negotiating on their behalf have already been having a difficult time getting lenders to respond; short sales take “forever and a day” to negotiate. There are just too many foreclosures. And there will only be more.

And will homeowners actually take action? The real issue here is that there is limited incentive for those in foreclosure to do anything about it. Now that home values have plunged, many homeowners are “upside down” on their mortgages, owing more than their homes are worth, and having withdrawn all equity during the “boom times”. It’s becoming easier and more rewarding for the homeowner to just walk away. The proverbial ATM is empty.

As we all know, “what goes up, must come down”. By some accounts, home values are down for the first time since the Great Depression. Home values had skyrocketed over the past number of years, growing at a rate far exceeding average salary growth. So to afford the American Dream, citizens of America had to get into mortgages that overextended them, often getting into ARMs with low initial rates that were scheduled to reset, only delaying the inevitable. All for a chance at the American Dream! Can we blame them? And can we blame the lenders for trying to help (not saying that all lenders are selfless).

Even more disturbing is the natural propensity of our culture to use home equity as an ATM, forsaking all reason. It is not all lenders’ fault, even though it has become popular to point fingers at these “unscrupulous” bankers. These are just some of the reasons why we are in this mess. Call me cynical, but I really doubt that a 30-day time-out will do a whole lot.