Friday, October 31, 2008

Why the Foreclosure Crisis is Hard to Fix

The government has thrown billions at the foreclosure crisis, but as Sheila Bair, head of the Federal Deposit Insurance Corp., told the Senate last week, “There has been some progress, but it’s not enough.”

Until the sweeping foreclosure problem is resolved, mortgage system woes will persist.

Here are five reasons why the foreclosure crisis has proven difficult to fix:

  1. Falling home prices: More than 23 percent of home owners with a mortgage owe more on their loans than their homes are worth. Lenders won’t give new loans to people with negative equity and that leads to owners walking away, causing the lender to foreclose.

  2. Too many investors: More than 30 percent of properties in the foreclosure process are owned by someone who doesn’t live in the property, according to RealtyTrac Inc. Programs that help home owners in trouble are not designed to aid investors.

  3. Complex investments: Nearly all mortgages in the last decade have been packaged into securities and sold. Investors in these securities are hesitant to agree to loan modifications because it will mean a significant loss. U.S. Rep. Barney Frank, D-Mass., has accused hedge fund investors of blocking loan modifications. In a letter summoning hedge fund investors to a hearing, he wrote: "For the hedge fund industry, which has flourished for much of the past decade, to take steps so actively in opposition to what is currently in the national economic interest is deeply troubling.”

  4. Job losses: Unemployment is the main reason people can’t pay their mortgages. As the unemployment rate has risen above 6 percent, the percentage of mortgage delinquencies caused by job loss has risen to 45 percent.

  5. Small modifications don’t work: One third of all subprime loans modified in the third quarter of 2007 were delinquent again within 10 months, according to a Credit Suisse report.

Source: The Associated Press, Alan Zibel (10/27/08)

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