patient – There is this feeling among many that this plan is some great giveaway. It is really not if you read the details.
1. It extends FHA guaranteed loan conversions (to fixed mortgages) to people who are CURRENT on their mortgages. Almost zero taxpayer money involved. If any, some losses will be borne by lenders since they won’t get their juicy yields. The CMO holders will feel stiffed. Why should taxpayers worry?
2. It allows homeowners with upside down loans to petition the lender for partial loan forgiveness (probably for a short sale). The lender has to agree to that. It seems to be a vary laborious and difficult process, and usually denied. With the proposed rule, with possibility of fraud you described, lenders will be even more stingy in allowing any forgiveness. I am sure they will never allow it for recourse loans (HELOC). They will be incredibly stupid to allow that and I am sure the IRS rules will be written to exclude them from tax leniency. No fear of subsidizing Vegas, drugs etc.,
IRS will write the law to carefully verify that the loans are non-recourse, limited to small amount and may even demand personal bankruptcy from the borrower to prove hardship. Nobody has ever accused IRS of being kind and forgiving.
