Financial analysts to Congress: Homeowners need more help

[Dec 8, 2009.]

 

In her testimony to Congress, Laurie Goodman, a senior managing director of Amherst Securities, advised lawmakers that the Making Home Affordable program is not meeting the needs of homeowners who owe more on mortgage loans than their homes are worth.

Citing falling home values as the primary cause of U.S. mortgage defaults, Goodman predicted that the Making Home Affordable modification program would fail unless it's reworked to assist homeowners who cannot refinance or sell their homes due to negative equity. She further predicted that 7 million of the 7.9 million mortgage delinquencies reported during the third quarter of 2009 would end in foreclosure due to negative home equity.

Echoing Goodman's concerns about the effects of negative home equity on mortgage delinquency rates, Julia Gordon, senior policy counsel for the Center for Responsible Lending, noted that "Homeowner equity position has emerged as a key predictor of mortgage modification re-default, more so than unemployment or other factors."

Her comments suggest that borrowers underwater on their mortgage loans may be compelled to abandon their mortgage obligations even after getting a trial modification through the Making Home Affordable program. Fewer than half of the 3.2 million homeowners targeted by mortgage companies for the Making Home Affordable modification program may qualify for the program due to issues including insufficient income and long-term unemployment.

Legislators Mull Solutions to Mortgage Loan Woes

Barney Frank, chairman of the House Financial Services Commission, will introduce legislation to provide loans to unemployed homeowners. If approved, this legislation could provide temporary "bridge" funds for making mortgage payments while between jobs.

A provision allowing bankruptcy judges to lower mortgage rates, extend repayment terms and reduce mortgage balances even if mortgage lenders object is being added to financial legislation expected to be voted on this week. Similar legislation stalled earlier this year after mortgage lenders protested the idea of bankruptcy judges having the power to "cram down" mortgage loan balances.

Reducing Mortgage Balances: Cheaper than Foreclosure?

Mortgage lenders resist relief efforts involving reduction of mortgage balances, but in cases where home values have fallen far below mortgage loan balances, writing down balances may be wiser than allowing homes to go through the foreclosure process, having to invest in repairs and marketing, and making concessionary financing available to buyers.

Realistically speaking, there is no way to avoid losing money on mortgage loans secured by homes worth considerably less than the mortgage amounts. With the national unemployment rate at 10 percent, and with many states suffering higher jobless rates, it's unlikely that foreclosures will wane anytime soon. Legislators and mortgage lenders must cooperate to develop a new set of solutions for assisting deserving homeowners and minimizing future foreclosures.

 

About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.