Foreclosure Conundrum

Lately, we have heard that 1 in 3 homes bought in California is a foreclosure. In the first quarter [Q1] of this year, 47,171 homes were repossesed in California, a record. Also in Q1 California public records show 110,000 notices of default [NODs], up 143% over last year. An NOD is the first stage of the foreclosure process. Typically, 3 in 10 NODs result in foreclosure.

While some may see bargains on the horizon, there are also horrendous social costs involved in each and every foreclosure. On such a massive scale, whole neighborhoods could be devastated, school districts and tax bases adversely impacted. Such dislocation,often resulting from job loss, has other consequences, such as divorce, suicide, physical and mental trauma, which, in turn, impose more costs upon society as a whole.

Bearing this in mind, last year the Federal Housing Administration [FHA] reportedly paid $158.6 million to keep lenders from foreclosing, up 61% from 5 years ago. Six in 10 homeowners with NODs were able to stay in their homes.

Some Democrats in Congress, notable Barney Frank, Chair of the House Financial Services Committee, are promoting bills to refinance borrowers into FHA loans, guaranteed by the government. Frank estimates this may entail up to 2 million mortgages at a cost of $3 to $6 billion. Foreclosure rates among those with FHA loans are much lower, primarily because of such “workouts”. A “workout” may cost from $136 to $7,169 per year. Already, the FHA workouts have saved $2 billion in loans and prevented the ravaging of whole neighborhoods. Today, after all costs are factored in a foreclosed home brings the bank on average about 55 cents on the dollar. Multiplied by millions, this is a potentially stunning blow to the mortgage industry and, by extension, the financial markets, just now staggering back to normalcy.

But is such a bill really a good idea? Other Dems and many Republicans say the system would be rife with abuse. They say the market should be left to work itself out. Cheating homeowners won’t make payments anyway. The FHA is pushing loan servicers to make modifications that won’t last. In a declining market, homeowners will eventually lose their homes anyway, pushing foreclosed homes onto the market in the future resulting in even lower returns.

The Department of Housing and Urban Development [HUD] which oversees FHA strongly opposes such congressional action. Its position is that such a law would force the agency and taxpayers to take on excessive risk.

The question then becomes how far should the government go to prevent the escalating social costs of foreclosure? Assuming the money would be spent anyway, [and we can’t assume this really] is preventing foreclosures the best use of the taxpayers’ dough? What is the social cost of 2 million families forced from their homes? Where is Solomon when we need him?

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