Home Loan Advice

In the past few years the U.S. housing market entered into the worst collapse since the Great Depression. As the economy continues to creep along, lowering business earnings and keeping unemployment high, the number of foreclosures continues to increase. It even seems that in some ways, the mortgage problem is getting worse since home prices are continuing to fall, causing homeowners to owe more than their house is worth. On top of that, lender’s haphazard and borderline illegal document practices have been exposed and lenders have devised special deals to get their companies off the hook, in part, while homeowners struggle in a limbo of uncertainty. Lastly, many of the government efforts to stem the tide of foreclosures are being widely viewed as failures.

Let’s face it, there’s plenty of blame to go around. The US government encouraged and, in some cases, even required, lenders to make questionable loans. Banks and other financial institutions packaged loans into questionable and risky financial instruments. And, many homeowners gambled that house prices would continue to rise and allow them to flip a house that they really couldn’t afford. Unfortunately, this housing crisis also has affected millions of people who’ve been caught up in the mess due to unemployment and/or other financial difficulties brought on by the weak and virtually stagnant economy. Over 5 million homes have been lost to foreclosure in the past 4 years and it’s expected that 3-4 million more homes will be lost during the next 2 to 3 years, especially if the economy remains weak.

Each new foreclosure places yes another distressed property into the market. This, in turn, pushes prices lower. This is creating a downward spiral that becomes difficult for the economy to pull out of. This creates a glut of unsold homes that weighs down the housing market, hurting the sale of existing homes as well as the construction of new homes. While government tax credits for new home buyers did help stabilize the market briefly, once these incentives expired, home prices began to spiral downward again. The big problem is that as home prices drop, household wealth drops and this, in turn, causes consumer confidence and spending to drop.

The Obama administration and Congress don’t seem to have any fresh ideas to help with the foreclosure crisis and have little incentive to work together to improve things with the 2012 election cycle looming. The main thing that’s been attempted so far, the Home Affordable Modification Program, is widely regarded as a failure. This foreclosure relief program has been hampered by confusion over ever changing regulations and the refusal by lenders to undertake the most draconian recommendations such as forgiving part of a mortgage loan’s principle. Many struggling homeowners have entered trial modifications only to find themselves worse off than they were before. Many lenders are non-complainant or intentionally create bureaucratic  roadblocks for homeowners.

For example, lenders are supposed to have assigned a single point of contact to help homeowners with the red tape associated with obtaining a home loan modification. However, many lenders have not created such a contact. Others have outsourced this function to collection agencies and the like who use typical collection tactics to try to force payment. Other’s have the contact person but, at the same time, use a hired  loan subservicer to accelerate the foreclosure process. This means the contact person is simply a stall tactic or a tactic to gain more information for collectors and subservicers. Even worse, cutbacks in government programs mean that there are fewer  housing counselors available opening the door for scams as people get frustrated by long waits for help and an increasingly aggressive collection effort by lenders.

There is huge potential for the foreclosure crisis to get worse. Roughly 14 million home loans in the US are ‘underwater’ right now, many of them more than 30% below the amount owed. While these people are able to remain employed and make payments, they’ll stay in their homes for the most part. However, it also means that they’ll be cutting back on consumer spending, thus slowing down the economy. If the economy continues to sputter along or even stall, these people may lose their jobs and create a brand new surge in foreclosures.

Is there a solution to the foreclosure crisis? I don’t think that there’s an easy one. I’m no fan of government intervention and over-regulation but the average person is virtually powerless against a mega-bank that’s backed by a large collection firm or loan subservicer. I think that a combination of tax incentives and breaks, for both consumers and lenders, and regulations that prevent the most egregious practices by lenders would help. Of course, in the current political climate, I don’t see anything like this happening so hold on, it’s going to be a bumpy ride.