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.

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This act expands on a previous one, Hope for Homeowners, that essentially failed to help distressed homeowners. Because of the many administrative problems and stringent requirements only very few homeowners were about to refinance high-interest rate home loans for a 30-year fixed loan that was backed by the Federal Housing Administration. The previous law was intended to assist around 400,000 American homeowners but failed to do so. This new piece of legislation eases the previously tough eligibility requirements. It also promises to lower the cost of loan modification for both borrowers and lenders. It is hoped that these improvements will help the housing market, weighted down by foreclosures and distressed home sales, recover over the next 2 years

There is still a lot of red tape to deal with when seeking to negotiate a new home loan with a lender, especially when one is behind on payments or significantly ‘underwater’, meaning that the homeowner owes more on a mortgage than the home is currently worth on the housing market. Many people who’re seeking a loan modification due to being stuck with unaffordable house payments have reported considerable backlogs and confusing submission rules. Will the Helping Families Save Their Homes Act improve this situation? It’s too early to tell at this point. One bright point though is the related Making Home Affordable program which has been able help around 50,000 homeowners obtain more affordable terms for their mortgages.

It is hoped that these improvements in home loans will help slow the supply of foreclosed homes since this, in turn, tends to lower prices on everyone’s home. This year may see as many as 2.5 million foreclosures and could potentially negatively impact as many 20% of all US homeowners within the next 2 years if improvements in the market don’t occur quickly. It is hoped that this new program will kick in quickly and reverse this trend.

The bill failed to include a measure that would have allowed bankruptcy judges to modify the terms of a home loan to reduce a homeowner’s monthly payments should they go into bankruptcy. Industry pressure prevented this part of the measure. However, the Helping Families Save Their Homes Act does include a provision to protect renters when their landlord is foreclosed on. Under this new law, renter’s leases must still be honored and, should they be on a month-to-month basis, the law requires that they be given a minimum of 90 days notice. Another key provision of the law is that loan servicing companies are protected from investor lawsuits, aka a “safe harbor”, when they modify loans to prevent foreclosure under the government loan modification guidelines.

If you are seeking a mortgage modification for yourself, make sure that you pick the best option for you. There are scams out there so be careful. Also be aware that some modification programs simply add missed payments to the principle of the loan, ultimately making the home loan less afforable. Some homeowners who have had this kind of modification found themselves once again facing foreclosure when new, higher, house payments kicked in a year or so later. Make sure that you work with a HUD-approved credit counselor in this difficult process.

Another common problem is that loan service companies are swamped with loan modification requests from distressed homeowners seeking help. Many do not have the staff to handle the volume of requests and either don’t answer phones or use cheap outsourced labor from outside the US. Also, since it usually requires several calls to get a loan modification processed, this often means starting over from scratch several times. While this is frustrating, make sure that you are prepared to assist the customer service representative get up to speed quickly on your case. Don’t assume that they have everything they need handy.

If you need help in adjusting your mortgage I encourage you to investigate your options under the Helping Families Save Their Homes Act. It may just help you in your foreclosure prevention efforts.

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