Foreclosure Crisis - Foreclosure Freeze Will Distort Housing Market
When Bank of America extended the freeze on foreclosures to include all 50 states, one might expect a sigh of relief from stressed homeowners on the brink of foreclosure. The truth is, this action is likely to be replicated by several other major mortgage institutions and will led to even more instability in the housing market in the future.
The government approach to the housing crisis and the increasing foreclosure rate has been weak and unfocused. The selling and reselling of mortgage pages as investment instruments was so chaotic that homeowners in some cases don't know who owns their mortgage. The advice given to homeowners in trouble is to talk to their mortgage lender yet many of these company's cannot be reached by phone. Instead, the mortgagee finds himself on a never ending loop of automated phone messages that lead nowhere.
When the housing market crashed following Wall Street's crisis two years ago, realty experts tried to ignore the realty of lowered home prices. It wasn't long before the economic crisis in housing began affecting both home sales and foreclosures on risky loans.
Perhaps the one thing that might have stabilized the housing market in the early crisis was a freeze on foreclosures and a massive, industry wide restructuring of home loans. This would not happen as it would interefere with the right of financial institutions. Such a massive approach would only occur under a situation of national emergency.
However, the every rising foreclosure rates are a national emergency for homeowners. Foreclosure actions this year are no longer against those who took mortgages that were high risk or bought homes they couldn't afford. In 2010, homeowners who had paid their mortgages faithfully for years are losing their homes. A risky housing market combined with a high rate of unemployment is a recipe for disaster.
The government programs to bail out mortgage holders addressed the problems of those who could not afford their mortgage to begin with. If your home value dropped and was now less than the mortgage on the home, the program would take an application from you.
If you still had equity but were having problems meeting payments due to temporary loss of income, you were out of luck.
Freezing foreclosures will likely make the fourth quarter of 2010 appear to be somewhat better for the real estate market. That will be a deceptive impression. Home prices are depressed by about 25% currently in many areas. This percentage is in part due to the short sales and foreclosure sales occurring nationwide.
A prolonged period of a foreclosure freeze could lead to an increase in banks willing to accept short sales. This would only decrease prices even further. Economists are at odds over the best way to stabilize the housing market. Some insist the market should be allowed to crash before it can rebuild. Others insist a total re-structuring of mortgages to current interest rates is the only equitable way to stabilize the market without further harming homeowners.
Requiring all home loans to be rewritten at the then-current 6% interest rate a couple years ago would have been a bold and high risk move. In hindsight, it might have worked to stability and equalize the real estate markets nationwide. The foreclosure freeze may have more downside that expected due to the government's unwillingness to address the problem. The tendency in D.C. to study problems and analyze potential solutions puts legislators on the fence and eliminate decision action to address the problem.