Feds say Brevard County foreclosure is not the best solution

More than four years into the housing crisis, and after millions
of Americans have lost their homes, Federal Reserve Chairman Ben
Bernanke is finally taking a stand. Bernanke sent a Federal
Reserve paper to the leaders of the House of Representatives’
Committee on Financial Services arguing that relying heavily on
foreclosures to deal with mortgage borrowers that can’t meet
their obligations is “costly and inefficient” for the housing
market because they can lead to deteriorating homes and weigh on
the property values in the surrounding community. Instead, the
paper encourages lenders to “aggressively” pursue loan
modifications and for servicers to be given more incentives to
seek alternatives to foreclosure. Brevard Foreclosures “can result in
‘deadweight losses,’ or costs that do not benefit anyone,
including the neglect and deterioration of properties that often
sit vacant for months (or even years) and the associated negative
effects on neighborhoods,” the paper said. “These deadweight
losses compound the losses that households and creditors already
bear and can result in further downward pressure on house
prices.”

The paper mirrors findings from regional Fed banks indicating
that foreclosures can be detrimental to more Americans than just
those who are losing their homes. Properties that are occupied,
but in foreclosure, drive down the surrounding property values
twice as much as vacant properties, an October study from the
Cleveland Federal Reserve found. And with millions of foreclosed
properties already in the pipeline, the foreclosure process is
already taking longer than in recent memory — a situation that
may only be exacerbated if lenders don’t take the Fed’s advice.
The average foreclosure process now takes 674 days, almost triple
the time necessary in 2007.

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Olick – half of all mortgages are underwater

“A new report on still-falling home prices today highlights the
fact that the lower those prices go, the more American borrowers
fall into an negative equity position; that is, they owe more on
their mortgages than their homes are worth.  Most analysts will
tell you that negative equity is the number one problem in the
housing market today, even worse than foreclosures, because it
causes foreclosures, stymies consumer spending and traps
potential home buyers and sellers in place.  Negative equity rose
to 28.6% of single-family homes with mortgages in the third
quarter of this year, according to Zillow. That’s up from 26.8%
in the second quarter. In real terms, that’s 14.6 million
borrowers.  Many of those borrowers are already behind on their
mortgage payments, and some are likely already in the foreclosure
process. The rest of them are in danger of defaulting, not
because they can’t pay their mortgages, but because they either
won’t want to (seeing as they will never see any real
appreciation in their investment) or because any change in their
economic or personal situation might force them into default
(change of job, divorce).

While 14.6 million might seem like a lot, it’s not the real
number when you consider negative equity in housing’s recovery.
That’s because it doesn’t factor in ‘effective’ negative equity,
which is borrowers who have so little equity in their homes that
they cannot afford to move.  Consider the following from mortgage
analyst Mark Hanson:  ’On US totals, if you figure average house
prices use conforming loan balances, then a repeat buyer has to
have roughly 10% down to buy in addition to the 6% Realtor fee to
sell. Thus, the effective negative equity target would be 85%.
You also have to factor in secondary financing, which most
measures leave out.  Based on that, over 50% of all mortgaged
households in the US are effectively underwater — unable to
sell for enough to pay a Realtor and put a down payment on a new
purchase without coming out of pocket. Because repeat buyers have
always carried the market as the foundation, this is why demand
has not come back. It’s as if half the potential buyers in
America died over a two-year period of time.’

The foreclosure crisis grabs most of the media attention these
days, but in order for housing to recover, the market needs to
see activity.  It’s as simple as buying and selling. Negative and
effective negative equity are causing stagnation, which may in
the end be far more detrimental than foreclosures. The argument
to solve this problem is principal forgiveness, and it is gaining
traction politically and somewhat less in the banking sector.
Principal forgiveness, or lowering the balance of a large chunk
of the nation’s mortgages, would be costly at best but could be
catastrophic at worst. ‘Those thinking principal reductions are a
panacea have never originated a loan, done the street level
research, and do not really know the borrowers behind their
data,’ argues Hanson. ‘More than likely it would create a far
greater number of new strategic defaulters than the number it
would legitimately save from Foreclosure.’”