How To End The Housing Crisis
There have been many attempts by federal and state governments to bring the housing crisis to a close and get the real estate market moving again. Some have attempted to prevent foreclosures so that people dont lose their homes. Others have encouraged the purchase of homes. The latest scheme aims to move foreclosures through the system more quickly by encouraging short sales. All of these areas should be addressed, but only in ways that will encourage the results we need. Many say that providing financial assistance to those who have made bad choices is unfair. Theres some truth to that. But were all in this economy together and everyone is suffering. We need to invest in those key areas that have the potential to turn things around. At the same time, we dont want to encourage the bad choices that have gotten us into this mess. Unfortunately thats exactly what some of the current plans are doing. Many people who bought homes they couldnt afford by financing them with stated income loans are living in their homes for free for months or even years. Meanwhile, mortgage companies are losing money with each day that goes by. In spite of the fact that they signed a contract to repay the amount they borrowed plus interest, many homeowners feel no qualms about walking away and leaving the lender holding the bag.
Lets look at some of the areas where government intervention can help. First up is foreclosures. Nobody wants families to lose their homes. It absolutely makes sense to prevent that in the cases where it can be prevented. Pennsylvania has a loan program that seems to be working. Whats their secret? Theyre making loans to people who can pay them back. There are many homeowners out there who can almost keep it together. Theyve lost their job, but they have a reasonable expectation of finding a new one. They have managed their money wisely, not racking up thousands of dollars of credit card debt. By loaning only to people who are likely to repay the loans, Pennsylvania has minimized the cost of the program to taxpayers. Even more importantly, though, theyve applied those dollars only to situations that have a good chance of success. Homeowners who havent made mortgage payments or paid property taxes for two years are not likely to catch up if you just give them more time. Were only delaying the inevitable, costing banks thousands of dollars each month. Loan modifications are a good idea, but so far lenders havent embraced that plan. Here again, we should encourage lenders financially to modify loans in cases where the borrower has a good chance of keeping current on their new payments.
The next area to look at is the huge shadow inventory. These are all the homes that are not yet foreclosed by the bank. If there is no way to save a familys home with a plan that will work in the long run, its time to move these foreclosures through the process. Many homeowners are trying to sell their homes as short sales. In a short sale, the homeowner finds a buyer and the lender agrees to accept a reduced amount as payment in full. The homeowner escapes with his credit intact and the lender gets the bad loan off their books. Unfortunately, lenders arent embracing this plan either. As they drag their feet and fail to approve short sales, these homes just remain part of the shadow inventory. Its gotten so bad in many hard hit cities that theres very little inventory of homes that are available for the buyers who are willing and able. President Obamas latest plan offers $1,000 to the loan servicer and $1,500 for the seller for each successful short sale. Sellers are already willing to sell their home via a short sale, with just the promise of getting out from under their mortgage without destroying their credit. The $1,500 is not going to do any good. The $1,000 for the loan servicers is a good idea, but is it enough? Loan servicers dont have the staff to process all the short sales. Any incentive should be enough for them to hire the help and still make money. Otherwise its not worth the effort for them. Maybe a similar incentive for deeds in lieu of foreclosure would be successful. The last piece of the puzzle is getting buyers to buy again. Tax credits have been offered to first-time and move-up homebuyers. These, combined with unbelievably low interest rates, will get some buyers to buy a home sooner rather than later. But the fundamental change in supply and demand that would take place if the shadow inventory was reduced would do more to encourage would-be buyers. And it wouldnt cost so much tax money. As distasteful as it sounds, the problem caused by some has become the problem of all. We must used government funded incentives at key pressure points, most of which would help those who made unwise decisions. Thats the only way to get the residential real estate market back on track for everyone.
April 13th, 2010 No Comments posted in Real Estate
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