Foreclosure nightmare continues
There’s an expression frequently bantered around by the TV talking heads that has caught my attention – “wicked smart,” meaning, of course, so smart it’s almost evil. Unfortunately, there may be a lot of wicked smart people in Washington but so far none of them have been able to alleviate the foreclosure mess, which just seems to be going on and on.
According to a recent report from government regulators and economists, the government bailout program designed to modify the mortgages of homeowners in order to prevent foreclosure is a dismal failure. The Government Accountability Office reported that as of mid-May only about $132 million has been spent on the program out of a potential $75 billion allocated. In addition, recent data suggests the program has helped only about 400,000 households avoid foreclosure with 530,000 falling out of the program.
At the end of July a Senate panel heard testimony from government watchdogs that the program isn’t working and that the Treasury Department has failed to fix the defects in it. One of the primary reasons homeowners dropped out of the program was initial pressure by the Treasury Department on lenders to sign up borrowers without insisting first on proof of their income. Later, when the banks attempted to collect accurate income information, many homeowners were disqualified or dropped out.
The basic flaw in the program is assuming that someone who doesn’t have the income to afford his/her existing mortgage will be able to afford a mortgage that is slightly lower, approximately $500 a month on average. They may struggle for a while longer with a lower payment, but eventually they will be in the same position costing taxpayers millions so they can stay in their homes a year or two longer. The plan just pushed off foreclosures into the future, trading now for later.
In addition, homeowners who qualify can receive an interest rate as low as 2 percent for five years and a longer repayment period. Basically it's rewarding homeowners for not paying their mortgages, funded by the homeowners who are paying at a much higher interest rate.
Mark Zandi, chief economist at Moody’s, said the program has not really helped a lot of people, and he predicts that about two million homes are likely to be sold over the next 12 to 18 months as foreclosures or short sales. More foreclosures translate to lower resale prices, and fewer new homes being built, further depressing the housing industry and associated products.
Banks and lenders are also not blameless in the failure of the program. The program relies on voluntary cooperation from mortgage companies that frequently can make more money when they foreclose than when they modify a loan. Lenders are also notoriously difficult to get in touch with, mis-place paperwork and take months to complete a modification.
This report from the Congressional Oversight Panel came on the heels of the president signing the most sweeping financial regulation bill since the 1930s. Unfortunately, there is very little contained in this new legislation to control the mortgage industry, which is still dominated by the two government backed agencies Fannie Mae and Freddie Mac.
Too smart to fail, I don’t think so. With all the wicked smart people in government and the Treasury Department they still weren’t able to make a dent in the country’s foreclosure nightmare. They just gave it a little nap.