Foreclosure Prevention Programs Often Do More Harm Than Good
by Jim Banford, CEO, Real Estate Asset Disposition Corp
West Palm Beach, FL -- Conventional wisdom holds that foreclosure is “bad”, an event to be avoided at almost all costs. It says that government should intervene between borrowers and lenders to create programs that keep people in homes that they cannot otherwise afford. Conventional wisdom, in this case, is wrong! While I have 17 years experience in many aspects of the distressed loan and real estate industry, I think that I could come to this conclusion without my body of knowledge. I would simply apply common sense.
Consider the many costs and responsibilities of home ownership. Obviously there is the mortgage payment that has been the point of greatest focus. But there are also real estate taxes, hazard insurance, property repairs and maintenance and in many types of ownership, Home Owners Association fees. When a home owner stops paying on his mortgage, he is also not likely to pay the other costs associated with ownership. These costs often exceed the principal and interest payment but are rarely addressed in foreclosure prevention programs.
Loan modifications typically involve an interest rate reduction. More recently, there has been an outcry to reduce the loan principal balance to below the market value of the home. To those unemployed or underemployed, how will they pay for the other aspects of owning their homes? Will the real estate taxes go down? No. Will the insurance policy premium go down? No. In fact, it will likely have risen dramatically as a result of the default and replacement policy. Will association fees go down? No. They are rising too, as fewer are paying the rest have to make up the shortfall. How about the cost to repair and maintain the home? Again no. The expense will be greater given the deferred maintenance associated with default. All of these cost will stay the same, (too high to afford), or rise.
Ocwen Financial Corp. is using a novel approach to loan modification involving a tiered principal reduction with the lender recapturing a quarter of the reduction if the property is sold for more than the new loan balance. However, the program does not reduce the other larger costs associated with owning a home.
Foreclosure activity and the resulting bank owned property (aka REO) levels are down. Again, this may sound like a good thing. Is it because more people are paying their mortgage? No, not even close. Lenders are waiting longer to start foreclosure. It’s not unusual today to have missed 12 mortgage payments and still not be in foreclosure. Once a suit begins, the average time to complete a foreclosure in Florida, for example, is 650 + days, up from 180 days four years ago. It’s interesting to hear the complaints that banks are not lending. Given the current climate and inability to collect on too many defaulted loans, it makes sense that lenders are not in a rush to put more capital at risk.
In my opinion, the system should not delay the real flushing out of all the bad loans into the future. The housing recovery can and will occur when the necessary correction is allowed to take place. Let the economy take its course, get people back to work, allow the stock market to stabilize. Buyer demand exists for these foreclosed homes and affordability is higher than it’s been in years. In simple common sense terms – put people in homes who can afford to own them.
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