Foreclosure Epidemic and Loan Modifications

Foreclosure Epidemic and Loan Modifications

This is from a recent New York Times article, that I am excerpting in part as it details the incredible scope of our foreclosure epidemic:

“The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday. 
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.


The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound. 
Unless foreclosure modification efforts begin succeeding on a permanent basis – which many analysts say they think is unlikely – millions more foreclosed homes will come to market.

“I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down,” said the housing consultant Ivy Zelman. 
The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008. 
The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.”

In my practice I am seeing foreclosures and attempted loan modifications on a scale that is unbelievable. I don’t attempt loan modifications as part of my practice because I do not believe that an attorney is a necessary component to that process and brings excessive cost to the mix. Some of my clients have accomplished it on their own, and what they achieve is what the mortgage companies will agree to, and my position as an attorney would not improve that. I have real power working within the court system, and even outside the court system where the real risk of court action compels compromise. However, here the mortgage companies hold all the cards and it is only enlightened self interest that makes loan modifications possible, and usually on their terms. I have yet to see a single case of a loan having its principal reduced. Usually it is just a temporary interest rate deduction and putting the arrears of the loan back into the principal amount to deem the loan current.

It is unfortunate that Congress did not make principal reduction on undersecured loans possible when it considered it last year and this year. I strip off completely unsecured mortgages that in second or third position regularly. However, at least some portion of the remaining mortgage is unsecured, meaning the homeowner is still to some degree “underwater.”

The foreclosure epidemic is not just a problem for those undergoing foreclosure or even just mortgage delinquency. It is a problem for anyone who owns a home because our property values are under downward pressure. However, as in all economic situations there are winners as well. That would be home buyers who can take advantage of lower prices and low interest rates at the same time. For those who have cash for a down payment, a job to fund the loan, and time to shop carefully, this is a great time to get into owning their residence, or even to buy rental property. As usual, those who invest in downturns are the ultimate winners.