A Simpler but Bolder Government Foreclosures Program
The apparent successes of the Obama administration with its bank stress tests and stimulus programs will not carry the nation to economic recovery if the government foreclosures programs are not radically enhanced to stop the impending foreclosure of more and more homes.
If the government foreclosures programs are not able to help troubled homeowners, mortgage loan delinquencies will increase to an overwhelming 4 million by the end of 2009. Foreclosures are expected to increase this summer as various foreclosure moratoriums implemented by states and by mortgage lenders have already been lifted.
Most foreclosure filings are not reversed and they go on to become foreclosures properties, inflating foreclosure inventories and pushing home values further down. Since the housing peak in 2006, an estimated $6 trillion in home equity has been lost.
Foreclosures have also downed financial institutions. Bank losses on subprime loans, jumbo loans and Alt-A loans originated during the real estate boom are expected to reach $1 trillion.
As foreclosures push down home prices, more home loans become underwater loans, more foreclosures occur, and the cycle continues. According to the latest foreclosure data, there are about 15.4 million borrowers, representing 1 in every 5 homeowners with mortgage loans, who are underwater, with the value of their homes falling further and further down, away from the level of their loans.
The current government foreclosures programs are to be lauded for their efforts to encourage more loan modifications through incentives both to lenders and borrowers. But many lenders have not taken advantage of the programs either because of lack of systems or because of plain refusal to work out loans.
Another problem with the government foreclosures programs is their limitation of lower monthly loan payments to only five years. For underwater borrowers, it makes more sense for them to walk away and simply see their homes added to foreclosures.
A bolder government foreclosures program is needed. One recommendation is for the Obama administration to simplify the loan modification process and rules by including in the rescue program all mortgage loans taken out from 2005 through 2008 which were inherently unaffordable – they were more than 90 percent of the value of the homes and their loan-to-income ratio surpassed 31 percent.
These loans are then modified, reducing the loan principal to approximate the current home value appraisal.
If the loans were already unaffordable at the time of the origination, they should have not been allowed. This argument will answer the question of using taxpayer money to rescue troubled American homeowners under government foreclosures programs.
Related Posts:
- Underwater Mortgages Driving Rise in Bank Repo Homes
- Repo Homes Lists Will Soar as Lapsed Mortgages Increase
- A Perspective on the Foreclosure Control Initiative
- Mortgage Modification Most Effective Way to Combat Foreclosures
- Obama Gearing for Foreclosure Prevention
