The foreclosure wave continues
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Published: November 16, 2009
After a few months of some better-than-expected housing news, home prices are likely to fall again, driven lower by a renewed surge in foreclosures. By conservative estimates, another 2.4 million homes will be lost in 2010, while prices will fall another 10 percent or so. This should be a wake-up call for the Obama administration. Foreclosures are expected to surge, in part, because lenders have been delaying the process during the long rollout of the administration's anti-foreclosure plan. But according to Moody's Economy.com, most troubled borrowers ultimately will not qualify for help, and a backlog of bad loans will soon enter foreclosure.
The Obama plan, which provides subsidies to lenders who modify troubled loans, has been flawed from the start. It has no teeth to compel lenders to participate. And it was primarily designed to help borrowers who defaulted because their loans had exploding interest rates or other features that made them suddenly unaffordable.
There were a lot more of those borrowers when the housing bust began, and for them, the plan's main remedy — reducing monthly payments — could work well. But with unemployment running above 10 percent, many people are now defaulting because they have lost their jobs. They will have trouble qualifying for help, because they can't make even reduced payments.
Millions of borrowers who now owe more on their mortgages than their homes are worth are also unlikely to qualify because borrowers without equity are at high risk of re-default, even on modified loans.
To help people with negative equity, the subsidies in the Obama plan should be redeployed so that they are used to modify loans by reducing the principal balance. That would restore equity in addition to lowering payments, and in the process, reduce the risk of re-default.
To help unemployed people who cannot qualify for loan modifications, Congress and the administration should expand programs to provide rental assistance, including help for foreclosed homeowners to rent their homes at a market rate. That would at least help prevent the blight that comes with abandoned housing.
On Tuesday, the administration announced that through October, 650,994 loans had been modified under the Obama plan. But the administration did not specify how many of those were trial modifications — reduced-payment offers that will become permanent after up to five months of steady payments by the borrowers — and how many had already become permanent.
The administration expects to provide that information within the next two weeks. Until then, it will be impossible to know how many people have actually avoided foreclosure. What is evident, now, is that at the current pace of modifications, and with the housing market coming under renewed pressure, the plan has little chance of making a meaningful dent in the crisis.
The housing bust sparked the recession. More foreclosures and renewed price declines will worsen the damage. American homeowners, and the economy, need an anti-foreclosure plan that works.
— The New York Times
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