Key Elements to End the Crisis on Foreclosures

Time icon December 9th, 2008 by Autor Joseph Smith

The crisis on foreclosures became the catalyst for the global financial crisis. No substantial program has been established yet as debates rages on as to what approach would be effective in dealing with foreclosures.

Key Elements to End the Crisis on Foreclosures

One suggestion was to use part of the $700 billion bailout fund to share losses with lenders in the event of foreclosures, as a guarantee for lenders to work out loan modifications with troubled homeowners. However, lenders are concerned as to what would prevent homeowners to once again default on their mortgages.

Three key elements should be addressed in order for a program to stop foreclosures successfully. The first one deals with the concerns of investors who own these mortgages regarding their return of investments, particularly with loan modifications. Banks should scrutinize every mortgage to determine how much a homeowner is willing and able to pay. If they see that their investors would earn more if they allowed mortgages to continue as compared to foreclosure then they will proceed. If not, foreclosures start.

The second element is better communication with delinquent borrowers. With the broad issue on the financial crisis, banks do not have time to deal with homeowners during the first month of late payments. Agreements usually state that loan terms can only be changed if payments are delinquent for a specified pre-determined time.

However, it may already come too late and foreclosures start. Borrowers should voluntarily communicate with their lenders. Lenders are having a hard time contacting borrowers. If this is improved, they can work out modifications at the earliest possible time.

The third element should be to consider foreclosures as part of the solution. Eighteen percent of mortgage holders are already in underwater, or they owe more with their mortgages than what their homes are currently worth. In this situation, refinancing would be out of the question, and short selling the house will definitely hurt.

But, letting some homeowners proceed with foreclosure could stabilize the market in the end. What is needed is a support plan for these homeowners (i.e. housing needs, financial guidance) in the event they lose their homes.

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