Some More Recommendations for Averting Foreclosures

The $75 billion program of President Barack Obama to solve the foreclosure crisis and save about 9 million distressed homeowners from foreclosures is admirable. But there are issues that must be addressed and recommendations that need to be considered by the program to ensure its success. The economists, financial analysts and other individuals running the program must continue to consider other ways to enhance the program.

The first issue is the insolvency of mortgage lenders and the banks. Loan modifications and loan refinancings will work only if the banks have the funds to carry out restructuring processes.

Another issue is the problem related to the estimated 2.3 million residential foreclosures in 2008, as counted by foreclosure tracking firm RealtyTrac. As this figure was linked to the estimated 2.6 million jobs eliminated last year, something must be done to make businesses survive the downturn so that they can preserve jobs. According to Kenneth Rosen of the University of California’s Fisher Center, up to 8 million new foreclosures will occur in the next 3 years if nothing is done at the national level to address the causes of foreclosures.

The first recommendation is to reduce the principal of mortgage loan balances by about 20 percent to help prevent foreclosures. The reduction in principal reflects current home values in the housing market. The 20-percent reduction is also a better option for mortgage lenders than the 40 percent that they lose in commissions, fees and discounts when they finally resell foreclosures.

Another recommendation is the setting of limits to write-downs in loan modifications ordered by bankruptcy judges. Based on data from the Congressional Budget Office, about 350,000 homeowners will likely file for bankruptcy in order to avoid foreclosures. To prevent a rise in bankruptcy filings, write-down limits based on current home prices must be set.

The third recommendation is the provision of compulsory counseling to all who receive loan modifications, refinancing, write-downs, bankruptcy provisions and other kinds of assistance. All homeowners must be enjoined to help themselves and prevent further foreclosures.

Before Obama’s program was launched, Fannie Mae, Freddie Mac and other mortgage companies were already using traditional loan relief techniques to help deserving borrowers. These techniques are still practicable especially for borrowers whose mortgages are not owned or guaranteed by Freddie Mac or Fannie Mae.

These are short sales, surrender of deeds, forbearance plans and charge-offs. Each of these techniques can help borrowers avoid foreclosures if they get cooperation from the lenders.

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• Maryland Foreclosure Homes – Can Freddie and Frannie Help?
• Obama Cites Government Foreclosures Campaign
• Fannie, Freddie: Roles in Containing Repossessed Houses
• Government Announced Plans to Quell Foreclosures