Breathing room for homeowners

Avoid foreclosure by granting moratoriums on loan repayment

AS THE economic crisis deepens, banks should expect more people to default on their housing loan repayments. Under the circumstances, is it in the interest of the banks to implement the commonly-practised course of action of repossessing the property and foreclosing the loan?

Granting the struggling debtor a moratorium and waiting for a better day is perhaps a better option than addressing the many issues involving foreclosure. In any case, granting a moratorium is a common practice in banking, wherein banks extend such facilities to corporate borrowers in times of need. In the case of project financing, a moratorium is often considered at the point of granting the loan, in order to accommodate the cashflow issues projects sometimes face during the start-up phase.

An individual borrower who is about to default or may have already defaulted on the housing loan is, in theory, no different from the situation faced by a corporate borrower facing difficulty financing the loan. But the impact on the individual borrower is much more than on the corporate body. The borrower‚s family is put through a period of stress due to circumstances beyond their control.

Getting banks to approve a moratorium - at least for a period of two years, by which time we should expect an improvement in our economic condition - will not only ease the financial burden on many families but also help alleviate the psychological pressures.

This will be a big relief to a number of responsible borrowers, who may be unable to repay their housing loans because they have lost their jobs.

Such a moratorium and reduction in interest would mean delayed repayments and a reduction in earnings for the bank over the next two years, but certainly not a loss; it is simply a case of deferring their income under special circumstances. This certainly pales in comparison to the magnitude of the losses posted by some banks on account of reckless lending.

This will be a win-win solution for all concerned, and will help consumers to participate in keeping the economy moving, in however small a way.

G Shekar

Source: Today - 6 Mar 2009