Obama Administration Attempts to Stop the Foreclosure Crisis
The Obama administration has devised another plan in the hopes that it will help the housing market bounce back to pre-recession rates of foreclosures. This is an effort to stop the ever-growing number of “strategic defaults” (walking away from a home, rather than face a huge loss from a sale) in America.
Their new approach is to pay some of the individuals facing imminent foreclosure to go ahead and sell their homes at a loss. This would not be a loss to the homeowners themselves, but a loss to the lenders. The losses the lenders would be left with are much less damaging than a total loss of the mortgage loan and would result in homeowners being able to lessen the damaging effect to their credit rating.
The new plan is one of the most aggressive the administration has put in place to date. With more than five million homeowners behind on their mortgages and at risk of foreclosing, very few have been helped by the government’s $75 billion mortgage modification plan. According to economists, consumer advocates, and some banking industry representatives, much more needs to be done to improve the housing crisis.
The administration is appropriately concerned that millions of foreclosures will delay – or possibly reverse – the economy’s recovery. The plan, which took effect April 5, encourages hundreds of thousands of borrowers who were previously unable to qualify for a loan modification to benefit from a process called short sale. Lenders will be compelled to accept the arrangement and forgive the difference between what they are owed and the market price for which they could potentially sell the property.
“We want to streamline and standardize the short sale process to make it much easier on the borrower and much easier on the lender,” said Seth Wheeler, a Treasury senior adviser.
Under the new program, the servicing bank will receive $1,000; if there is a second loan, another $1,000 will be given. The government will also give the homeowners a $1,500 in relocation assistance.
If successful, the program may have numerous benefits. The investment pools that own many home loans could get more money from the sale than they would with a foreclosure. In turn, homeowners will be assured that lenders will no longer sue them for the unpaid mortgage balance.
Another advantage is fewer empty homes within a community. Often, empty homes are vandalized – it is estimated that as many as half of all empty properties are ransacked by vandals or the former owners of the homes. This further depresses the housing market for those attempting to sell their houses.
Though last year short sales began to increase, they are still relatively uncommon. In 2009, Fannie Mae’s pre-foreclosure deals more than tripled. Many lenders, however, are still shunning the idea of the short sale.
The details of myriad potential conflicts are still being tweaked; lenders are treating short sales as a last resort for borrowers who have tried everything and are still unable to pay their mortgage.
Mr. Reddy, 32 who was at risk of losing his condo says, “A short sale provides peace of mind. If you’re in foreclosure, you don’t know when they’re ultimately going to take the place away from you.”
