With the presidential election now over political posturing can be put aside and we can get back to a central reality: Foreclosures don’t work.
There was a time when the mere threat of foreclosure was a powerful and effective way to enforce mortgage agreements. Don’t pay and you’ll lose your home. From the lender’s perspective foreclosure was a financial irritation but not a loser because properties could be quickly re-sold, often for enough to fully repay the debt and related costs.
All of this ended with the start of the mortgage meltdown.
Figures from RealtyTrac show that since 2005 nearly 18 million foreclosure notices have been issued. Many homes received multiple notices and some homes were saved from foreclosure through loan modifications and bringing the debt current, but the bottom line is this: Annual levels of new foreclosures stood at .4 percent of the housing stock before the meltdown. Now, our most recent figures show that 4.27 percent of all homes were in the process of foreclosure as of the middle of 2012.
With the huge increase in foreclosure actions the burden of loss no longer falls largely on the borrower. Now it’s the “lender” who eats the loss, sometimes a six-figure main course. And by “lender” I mean not the party that originated the mortgage but rather the investor who owns it today.
The threat of foreclosure is no longer a dire consequence. For some borrowers foreclosure is an option, a strategy and maybe even desirable — there are borrowers who have simply walked away from their loans.
Having lost their leverage, lenders are now embracing loan modifications and short sales. Not with glee, but with an eye toward the threat of foreclosure — to them.
The foreclosure process is a mess. RealtyTrac reported earlier this year that in New York, New Jersey and Florida it typically required more than 800 days to foreclose. Given the destruction left behind by Sandy, such numbers will likely increase in hard-hit coastal areas.
Banking veteran Alexander R. M. Boyle, writing in the American Banker, says “it would serve an enormous public purpose if the vast majority of new foreclosures could be moved into the category of short sales, thereby avoiding the financial and societal cost of foreclosure and eviction as well as the community impact of another abandoned property. Such a shift could give a significant boost to the housing recovery.”
Here’s an alternative idea: Why not modify all loans so they reflect today’s interest rates? That’s the way to support a public purpose, and for many people it would mean no foreclosure, no short sale, no eviction, no societal cost and no abandoned property. No less important, lenders would also be ahead because the “benefit” of a short sale is generally a smaller loss than would be the case with a foreclosure — but a loss nevertheless.