Regular readers of this space know that the burgeoning foreclosure trend represents a serious threat to recovery efforts in the housing market and the economy as a whole. The Chicago Fed partnered with several prominent state and local housing associations and groups at the Federal Reserve System’s Conference of Presidents Mortgage Outreach and Research Efforts to find solutions. At their December conference they discussed the foreclosure crisis and possible solutions to it. In the Federal Reserve’s April 2010 Chicago Fed Letter, several innovative and novel solutions to the foreclosure issue were presented.
The underlying causes for foreclosures have evolved over the last three years. In 2007-8 foreclosures were fueled by unaffordable loan products. In 2009 the main causes of foreclosure shifted to unemployment and underemployment, falling home values causing borrowers to be underwater, and strategic defaults. According to Mark Pearce, the North Carolina Deputy Commissioner of Banks, as many as 25% of mortgages could be underwater in 2010.
Lender reaction to the foreclosure problem has also changed over the last few years. 50% of foreclosures in 2008 were completed, while only one out of seven foreclosures initiated in 2009 have been completed. Banks have quickly discovered that the losses associated with foreclosures can be much greater than losses stemming from modification or missed mortgage payments.
It is evident that widespread foreclosures are detrimental to both lender and borrower. As a result, it is important to open lines of communication between banks and borrowers to reinforce that their interests are entwined, and that both sides must work together in order to stem the incipient deluge of foreclosures. The following is a list of some of the proposals that were floated at the conference:
- Streamlining the Home Affordable Modification Program (HAMP) so that it is easier for distressed borrowers to navigate the increasingly labyrinthine process. Under the proposal modifications would become permanent after three months of payments.
- Expanding the use of mandatory mediation between borrowers and lenders. This would promote open lines of communication and ease and speed the modification process.
- Requiring a freeze on foreclosures for those who have lost their jobs.
- Allowing those who cannot avoid foreclosure under other programs to stay in their houses as renters. This would be an expansion of the Fannie Mae Deed for Lease Program.
- Reforming bankruptcy laws so that those who declare bankruptcy would be able to protect their primary residence.
- A program that would enable underwater homeowners to get a new loan based on an update appraisal of the house. The plan would include a profit-sharing plan between lender and borrower in the event that housing prices rebound in the future, in order to avoid the moral hazard involved with such a program.
- Encouraging some municipalities to demolish abandoned houses in an effort to rehabilitate neighborhoods, remove blight, and reduce the excess supply of housing to help home prices recover.
The Chicago Fed emphasized in its letter that keeping distressed homeowners in their homes benefits both lender and borrower, and it is crucial that all sides work together to find an equitable solution to the process. They also warned that while it is important to improve underwriting standards, it is equally important to make credit available to borrowers, especially the lower end of the market. Striking a proper lending balance and addressing some of the underlying causes of the recession (unemployment, loss of income, and falling home values) will be the key to a mending the economy.
What do you think is the best way to solve the foreclosure process? Comment and join the discussion below.
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