Foreclosure-Response.org | Getting Started

Why should the government help borrowers who took out risky loans?

Government intervention to prevent foreclosures does more than assist the borrowers of risky loans. The negative consequences of home foreclosures spill over to entire communities and impose substantial external costs on municipalities, neighborhoods, and property owners. For example, homes left vacant or abandoned after foreclosure may lead to neighborhood distress and a decline in surrounding property values. A study by the Center for Responsible Lending calculates that foreclosures between 2009 and 2012 will strip neighboring homes of approximately $1.9 trillion (2009 Center for Responsible Lending). Government efforts to address foreclosures can help stabilize communities, safeguard local property tax rolls, and protect homeowners from equity loss.

While some families may have knowingly taken out a home loan they couldn't afford, others were largely the victim of high-pressure sales tactics and confusing and unfair loan terms. A study by the Center for Community Capital found that low-income borrowers were able to make mortgage payments when offered loans with terms that were more reasonable than those offered by high-priced subprime mortgages (Quercia Stegman Davis 2005).

In addition, the latest wave of foreclosures is mainly due to income loss from unemployment rather than any inherent riskiness in borrowers' mortgages. Government efforts can help vulnerable families stay in their homes and retain their equity, as well as prevent widespread losses in low- and moderate-income homeownership.

Click here to learn more about the ways in which foreclosures can impact families and communities.

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Aren't most mortgage problems so bad that foreclosure is the only option?

No. There are numerous examples of families who have successfully avoided foreclosure with the proper assistance. Automatic mediation programs, for example, have been particularly effective – in some cases allowing more than half of borrowers to remain in their homes (Jakabovics and Cohen 2009). Mortgage delinquencies due to unemployment or other temporary setbacks can be resolved through emergency loan programs that cover mortgage expenses for a limited time to allow the household to regain its financial footing.

Families can also work with housing counselors to learn about a wide range of alternatives to foreclosure and get help negotiating with their lender to get a loan modification. Loan workouts or loan modifications change the terms of a mortgage payment to make them more affordable to the borrower. Loan modifications can be helpful for many families, but lenders do not always make loan modifications that will be affordable for borrowers over the long-term, creating the risk that a family can re-default on a modified mortgage.

The Making Home Affordable program, provides a set of products to help with various types of mortgage difficulties, including the Home Affordable Modification Program (HAMP) that offers incentives to lenders or servicers to reduce mortgage payments and the Home Affordable Refinance Program (HARP) that allows some homeowners to reduce their payments by accessing lower interest rates.
As of the end of June 2011, more than 760,000 permanent loan modifications had been initiated, and the median monthly mortgage payment post-modification was 37 percent less than the median per-modification payment (Treasury 2009). Visit MakingHomeAffordable.gov for more information on the program.

Federal programs also exist to help homeowners at risk of foreclosure because of temporary financial setbacks, such as job loss, a medical condition, or other unforeseeable event. The Hardest Hit Fund, established in 2010, provides funding to Housing Finance Agencies in states with high unemployment rates or substantial reductions in home values for foreclosure prevention programs. A similar initiative from HUD, the Emergency Homeowners Loan Program (EHLP), provides funding to states that did not receive Hardest Hit money. ELHP provides forgivable loans of up to $50,000 over a two year period to homeowners at risk of foreclosure due to unemployment. Click here to learn more about EHLP.

It is important to note that even if a family cannot obtain a sufficient loan modification to afford its mortgage, the family still has options for avoiding foreclosure, including deeds-in-lieu of foreclosure and short sales. A deed-in-lieu of foreclosure refers to a situation in which a borrower is unable to pay his or her mortgage and voluntarily hands over the property to the lender. Short sales are an approach where a borrower avoids foreclosure by selling the home at a value less than the outstanding mortgage balance. The lender agrees to take that loss and collects all the proceeds from the sale.

Borrowers who cannot avoid losing the home may prefer these options,

From the Forum...

Learn about automatic (also known as “mandatory”) mediation programs, which have been adopted in many communities to bring together servicers and borrowers in an effort to explore settlement options and avoid foreclosure.

Click here to listen to a presentation on mandatory mediation featuring Alon Cohen and Andrew Jakabovics of the Center for American Progress and to view online Q&A with the speakers.

sometimes referred to as "graceful exits," since short sales and deeds-in-lieu are less damaging to their credit rating than foreclosure. Additionally, once the transaction is complete, the borrower is relieved of the loan debt. Lenders may enter into an agreement with the borrower to pursue a deed-in-lieu or short sale because the process is shorter and less costly for them than proceeding with a foreclosure.

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