The federal government’s response to the foreclosure crisis has been to promote an organization made up of industry insiders, lenders, and investors called Hope Now. Hope Now is set to release a new set of guidelines to their member companies in the next couple of days.

While a step in the right direction, the main thrust of Hope Now is misguided. Hope Now touts that in April 2008 that 60% of their loan workouts were repayment plans. The bulk of the additional loan workouts were short sales and deeds-in-lieu of foreclosure. All three of those programs end in the borrower being forced to leave their house. That isn’t exactly the definition of a ‘workout’ in the eyes of a distressed homeowner.

The repayment plan is always the first choice of the lender when their borrower gets behind in their monthly mortgage payments. That isn’t surprising. The lender wants the borrower to come up with the missed payments and get back on track.

The challenge with the repayment plans are that the borrower was unable to make their monthly payment. That is a structural finance issue. Plain english: they don’t have enough income to support their mortgage payment. Encouraging the buyer to borrow money from friends and family, withdraw money from retirement accounts, or attempt to re-finance into another exotic mortgage product is frankly unethical.

At Washington Foreclosure Assistance, we do not encourage re-payment plans unless the borrower has had a one-time income disruption and has the current income to support not only the previous mortgage amount but the additional monthly payments required from the repayment plan, and any future projected mortgage payment increases due to interest rate resets.

What typically happens is that a homeowner comes up with some money that they can send to the bank to put a hold on the foreclosure process. The bank then temporarily stops the foreclosure sale date. Within a month or two, the homeowner runs out of money before they run out of bills, and the payment for the mortgage is either late or simply can’t be paid in full.

The lender then has the right to immediately resume the foreclosure process where it left off. This could be only weeks or days from the foreclosure sale, giving the homeowner few options to save their house.

The bottom line is that the lender knows that the vast, vast majority of borrowers do not fulfill the terms of their repayment plans. With this knowledge, it is unethical to take additional money from the borrower when they are sure to lose their house a short time later.