What is the government doing about foreclosures?

As the housing market in America heads towards its fifth year of decline, many have grown angry at the government’s relative inability to make any significant improvement in the market. Like with many hot-button topics, the public is divided on whether Uncle Sam should step up their efforts, or let things play out. In this article we’ll take a look at a few of the measures, past, present and future, which have been taken to keep the foreclosure flood to a relative trickle and keep people in their homes.

First, we’ll look at two programs that were intended to prevent properties from making their way to the market as bank-owned foreclosures – HAMP (Home Affordable Modification Program) and HAFA (Home Affordable Foreclosure Alternatives). In short, these programs offered government-paid incentives to the banks so that they would modify troubled loans and approve more short sales quickly. While the taxpayer burden of both of these programs has been sizeable, the impact has been so small so as not to register as having made even a small dent in the numbers. Complaints surrounding these programs have been that they are confusing and hard for consumers to understand. The application process is a nightmare, resulting in many people getting their requests rejected. In the case of HAMP, even a rejected application reportedly results in a huge hit to one’s credit score, with none of the relief. Some owners (around half) who have managed to modify their loan still end up unable to make their payments and lose their home to the foreclosure monster after all is said and done.

Sadly, a massive backlog of foreclosure supply isn’t the only demon that needs exorcising. On the other end of the housing spectrum, demand has dipped down to levels that fail to sustain values, resulting in more underwater homeowners, more short sales, and more owners losing the will, the ability, or both to pay the mortgage man. In an attempt to spur buyers into action, a while back the government instituted a $10,000 tax credit for first-time home buyers, and a $8,500 credit for move-up buyers. Some states such as California instituted similar programs around the same time, allowing a lucky few buyers to drink from both wells. The programs were infamously expensive, and while a moderate uptick in buyer activity was registered, the majority of the money went to people who would have purchased homes during that time anyway. In the case of programs such as these, the principal issues were not addressed – sagging demand due to buyer reluctance to plunge into a down market, insecurity about their jobs and income, combined with widespread inability to qualify for financing.

More recently, the government has stepped up pressure on the lending institutions to make sure that in the future their lending practices will be more transparent to borrowers. People have had all kinds of gripes about the GFE (Good Faith Estimate), the document that breaks down all of the costs associated with financing a home purchase. Hopefully, the result of this work will be lending documents that are shorter, less boring, less confusing, and uniform from one loan type to the next. While this may not prevent foreclosures in the short-term, it is still a step in the right direction, as it should lead to better-educated buyers making better decisions about the loans they get.

At present, both the housing market and the government find themselves at a bit of a crossroads. Some programs have come and gone, while others are still in play yet with minimal effect. Either way, nothing that has been implemented, past or present, has come anywhere near meeting expectations or making a game-changing difference. With the hour late and the need great, a couple of “hail Mary” ideas have begun to materialize.

The first of these ideas is a sweeping refinance program that would allow all homeowners with government-backed mortgages to refinance them at today’s rock-bottom interest rates. By everybody, that includes homeowners who are underwater in their mortgages, and homeowners with lousy credit. This is key, because right now homeowners in these situations aren’t able to refinance, leading to non-payment of their mortgages and causing them to add to the foreclosure heap. Apparently, this would not only work as a potential salvation for some homeowners, but would work as a stimulant for others. In the past most programs have looked to help those that threaten to drag down the economy as a result of questionable decisions and/or unfortunate circumstances, while failing to reward those that have bought and paid responsibly. Estimates suggest that a program such as this could pump as much as $85 million back into the economy through homeowner savings.

The second program would incentivize financial institutions to rent out their real estate assets as opposed to selling them off on the open market. The thinking is that this will curb inventory, thereby stabilizing prices. Stable prices would mean less homeowners falling underwater, resulting in fewer foreclosures and reduced future inventory. Constricted supply will eventually meet greater future demand, and onward and upward we go.

Naturally, each of these programs has their detractors and potential drawbacks. The sweeping refinance program could face opposition from the regulator that oversees Fannie Mae and Freddie Mac, while investors in government-backed mortgage bonds may stand to get burned big-time. The foreclosure rental program is a bit more complicated, due to the fact that it adds more moving parts to the machine. Yes, rents are high at a time that the public needs a break, and oversaturation of listing inventory is tamping down prices. While renting out foreclosure properties addresses both of these issues, it also distorts market rental supply, and increased rental supply means that rental values go down. If this happens then real estate investors, a market sector that has been one of the only forces working to prop up the housing market will lose their incentive to buy, and we’re back to square one.

For the individual buyer or seller out there, it is important to note that government help does exist. There are real estate professionals in every local market who are well-versed on programs that can help either to keep the wolves at bay, or make purchase possible even for credit-and-income challenged buyers. Consumers of real estate should always take the time to research options, as they may be pleasantly surprised.

As the greater housing market slogs through another period of pessimistic reports and apocalyptic outlooks, one thing has become clear. If the government wishes to truly play a meaningful role in a housing market turnaround, it will require drastic action on the part of our country’s decision-makers. Yet for better or worse, half-measures tend to dominate their proceedings, which can be interpreted in any number of ways depending on one’s point of view. Perhaps it is a moot point, and this quagmire of a real estate market will only turn the corner in its own time, once enough of the underlying problems have been mitigated. Either way, as with so many things, only time will tell.