Foreclosure Crisis: How About the American Dream?
Posted in Foreclosure Crisis, October 9th, 2007
The crisis of foreclosure is embedded in a rash and ingloriously under regulated mortgage lending. Most homeowners with low incomes and poor credits are now stuck in adjustable-rate loans that have become unaffordable because of the hike in monthly payments. Mass foreclosures generally make for unacceptable damage on the economic and social life of the nation so I believe that the plight of these home owners is not entirely of their own making.
This crisis has been evident for the first time since the Carter administration where homeownership in the United States has declined over a president’s tenure. As the office was taken by President Bush in 2001, homeownership stood at 67.6 percent. As the mortgage bubble inflated, it rose, but it is projected to fall to 67 percent by early 2009, which would be 700,000 fewer homeowners than when Mr. Bush started. The decline, calculated by Moody’s Economy.com, is grim unless a heroic effort is launched to help hundreds of thousands of defaulting borrowers stay in their homes.
The relief efforts so far have also not been satisfactory. In August, the White House established a program to allow an additional 80,000 borrowers to refinance their loans through the Federal Housing Administration — on top of 160,000 who were already eligible. But that was not enough as foreclosure filings soared to nearly 244,000 in August alone.
Gretchen Morgenson reported recently in The Times, that during a survey of the top 16 sub-prime service providers by Moody’s Investors Service, it was found that modifications were made to an average of only 1 percent of loans on which monthly payments had increased during the first half of the year. In order to be effective, modifications must reduce a loan’s interest rate or balance or extend its term.
There has to be an executive leadership who can bring together many players, which includes lenders, service providers, bankers and various investors. It becomes difficult to agree on a rescue plan because all of them are affected differently depending on whether and how a borrower is rescued. But mega profits were also made by all of them during the mortgage bubble. Under firm leadership, they could come up with a way to modify many loans that are now at risk. The most important thing is to mend a glaring defect in the current bankruptcy law that prohibits the courts from altering repayment terms of most mortgages on a primary home.
