Mortgage Foreclosure Policy: Past, Present, and Future

This is a follow up to a recent Foreclosure Seminar I attended at the Federal Reserve Bank of Chicago on December 9th and 10th

The two day Seminar was quite impressive and the discussions were even more interesting. 

THE   PAST: 

Home ownership was considered the American Dream.  As desire to own a home increased  the building boom soon followed. As new homes were being build, new buyers entered the housing market.

 New Buyers created a demand for new mortgage products.

 The rapid appreciation of home values fed the the second boom in housing demand.

As more buyers entered the market,  mortgage lenders competed with one another and tried to attract these buyers with exotic mortgage products ( sub-prime, Adjustable Rate, Intrest only, 100% financing) with teaser rates.

The combination of new buyers, higher risk loans, and higher risk capital all created a very competitive housing market. 

Loan originators had no risk because they did not hold onto the loans. They pooled and sold these mortgages to the Secondary Mortgage Market. 

There became a market demand to bundle these high risk loans as security instruments and sell them to investors on Wall Street.

 Private-Labeled securitzation fueled the demand for high risk lending. Sub-prime and Alt-A2 mortgage backed securities increased from $98 billion in 2001 to $814 billion by 2006.

Investors who bought and sold these securities felt home values would compensate for any risk associated with the loans. If a loan went into default the homes value would more than cover the cost of the loan.

 PRESENT:

 More homeowners are falling behind. One in four homeonwers are delinquent on their mortgage. 

Foreclosures are at an all time high and home values are declining as a result.

 The  Government  program to modify loans  “Making Home Affordable Modification Program” (HAMP) has been a failure to date.

Only a fraction of the mortgages on a national basis have been permanently modified.

 Nationally there are over 9 million homeowners in default and to date there are only 728,000 active modifications. Only 31,282 mortgages have been permantly modified across the nation. This means a majority of the modifications remain as trial mortgages.

It is predictated that most of these mortgages will re-default.

Finally, more homes are just being abandoned and left vacant. These vacant buildings cause more crime, continue to lower home values for  neighborhoods.

Future

Most of the experts predict the foreclosure crisis and larger financial crisis to continue well into 2010 .

New Option Arm Loans are due to reset next year, and unemployment will cause more homeowners to fall behind on their mortgage.

Home values will continue to decline and more people will owe more money than their home is worth. 

As more people go into foreclosure neighborhoods, cities, and regions are impacted.

 Vacant buildings that are neglected cause siginificant concern for most city officials. Not only is crime a problem, but the cost to cure the problems is a major concern.

 To address this problem communites are using Neighborhood Stabilization Program (NSP) dollars to buy up foreclosures in the community, demolish homes that are not salvagable, and rent and sell homes to qualified buyers.

It was recommended and generally accepted by most people who attended the seminar that it was best to keep homes occupied.

More effort  is needed to modify loans and keep people from loosing their homes to foreclosure.

The current “Extend and Pretend” policy of lenders needs to be abandoned. As home values continue to decline current mortgages should be re-set at the current market values. 

 Lenders will be required to write-off the difference between what is owed and the current market value in order to keep people in their homes.

 Until this happens, communites most affected will have to find ways to assist people and keep them in their homes.

Better foreclosure prevention programs need to be developed.

 Pilot programs like Annette Rizzo’s court in Philadelphia, where homeowners and lenders are forced to negotiate in a court room, needs to be explored and reviewed to see if it really does help people and stop foreclosure.

Better Credit counseling programs need to be developed where people are taught how to save more money.

Creating New Zoning ordinances and Urban design to help families work and live and prosper together.

  1. Peter Quinn

    Hi. I am a long time reader. I wanted to say that I like your blog and the layout.

    Peter Quinn

  2. Todd French

    I like where things are heading. People realizing that we just can’t toss money at an issue to solve it. This seems like it has been a long time coming- glad some people actually decided to use their brains and create solutions.

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