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HUD Secretary: Total moratorium on foreclosures could delay recovery of housing market

[Oct 20, 2010.]


Three major mortgage lenders recently declared a moratorium on foreclosures due to alleged problems with their documentation. Critics and community advocates are demanding a nationwide moratorium on all mortgage foreclosures. But HUD Secretary Shaun Donovan suggests that stopping all foreclosures could have unintended consequences for housing markets, communities and home buyers.

Why a moratorium could make things worse all around

Secretary Donovan estimates that 25 percent of current home sales are foreclosed properties. Stalling the foreclosure process would keep mortgage lenders from acquiring title to homes and selling them until the moratorium is lifted and foreclosure is completed through a sheriff's sale or public auction.

Who could be affected by a nationwide foreclosure moratorium?

  • Homeowners (part 1): If your mortgage is in foreclosure, a moratorium would delay the legal proceedings that allow a lender to take title to your home. Meanwhile, the cash register keeps ringing; your mortgage payments, late charges and other costs continue to accrue. If your mortgage loan has been affected by a moratorium, ask your lender about alternatives to foreclosure.
  • Homeowners (part 2): If you're doing OK with your mortgage payments, but your neighbors' homes are being foreclosed, your home value may continue to decline. A foreclosure moratorium causes abandoned homes to fall into limbo; mortgage companies cannot renovate damaged or derelict properties and restore normal property values until they take title through foreclosure sale or auction.
  • Mortgage lenders and investors: The longer it takes to liquidate mortgage loans through foreclosure, the more non-performing assets remain in mortgage investors' portfolios. FHA has already announced its intention to ramp up its review of FHA approved lenders. Moratoriums keep mortgage lenders from reducing foreclosure losses through the sale of repossessed homes and filing claims with mortgage insurance companies, FHA and VA.
  • Housing markets and communities: Foreclosures create problems with damaged homes and falling property values; this decreases property tax revenue for counties and local governments. A moratorium would delay sales to new occupants, and if many properties remain rundown, communities may experience higher crime rates. Home buyers may be discouraged if a neighborhood has multiple foreclosed homes.
  • Home buyers: A foreclosure moratorium prevents lenders from acquiring and selling foreclosed properties, this prevents any turnover of vacant and damaged homes to new owners willing to renovate them. Foreclosed homes are often sold at below market prices and buyers may be offered low mortgage rates or other concessions.

Public outcry over failing government programs for preventing foreclosure is causing the FHA, an agency of HUD, to increase its review of FHA approved lenders and their policies and procedures. If you're considering buying a foreclosed home, please consult with a real estate professional specializing in such properties.


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.

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