The Foreclosure Crisis And The Lesson To Be Learnt From It

There are lessons to be learnt from the raging foreclosure crisis – lessons about how to go about with mortgages in the future. The times are troubled. Help is coming too late for the foreclosure victims. The trauma of evictions is leaving families shattered. Hence it is imperative that this does not repeat itself and accordingly future mortgage plans need to be drafted.

Adjustment in payment should be routine, automatic, systematic and continuous. It should get into action even before distress signals are flashed. By giving attention to each mortgage, institutionalized damage can be avoided. The mortgages should be continuous-workout-mortgages. Worked out over time covering the life of the mortgage it should allow for house owners to keep some equity on the house while keeping up with the regular payments. It is the loss of equity that has made the foreclosure crisis of today so virulent in its attack. The rates should be standardized and adjusted to the housing cost indexes, future markets as well as economic indexes like rate of unemployment.

Privately offered continuous-workout-mortgages would be the best option. There would be no bailouts. The workout will be calculated according to the rate of the original mortgage. The actual risk of the investor becomes transparent at the very onset of the mortgage. Over valuation will become impossible. This will erase all possibilities of a foreclosure crisis of jumbo proportions that we are witnessing today. It is the fast falling decline of the sub-prime mortgages that has triggered off this foreclosure debacle.

Forced sale of reo properties will be avoided. This will ensure that the lender does not incur any loss as is happening today. Litigation costs will be down and so will the fear for the lender of house maintenance and collapse of neighbourhood value of houses. Anticipating lower costs the lender can offer better terms for the borrower.

For such a step government help will be required. The Congress has recently passed the Housing and Economic Recovery Act that has promised help to 400,000 foreclosure victims facing eviction. Unfortunately the act did not change the mortgage rules and no plan was included to prevent a recurrence of this foreclosure virus. Previously the Congress had been more innovative as during the housing crisis of 1933. At that point the Home Owner’s Loan Corporation was created to enforce some basic changes in mortgage bodies and rules.