Foreclosures: It’s Time For Government Action On Foreclosures

Posted on November 27th, 2007 by saman

Now that the continuing sub prime mortgage foreclosure has brought the national economy closer to recession, it’s clearly time for less talk and more action on the part of our government. The effects are being felt everywhere. On Wall Street, where the market has been a volatile roller coaster ride; on Main Street, where entire communities are feeling the pain; and in the financial industry itself, where numerous companies have gone out of business and thousands of employees laid off.

There has been no shortage of suggestions, ideas and proposals, but too little action despite the fact that the scale of the national problem keeps growing. Granted, some individual states seem to be concentrating on the problem, and some government agencies, like the Federal Housing Administration have made progress. Nevertheless, it comes far too late for some and has been limited to future prevention, which is admittedly a good first step. It is, however, time to act on some of the better suggestions that have been made to bring troubled homeowners some realistic relief.

What should be done is to create new laws that give American families facing foreclosure an opportunity to workout their mortgage problems before their homes are foreclosed. The suggestion that a law should be enacted that would give them some financial stability even when the market itself cannot, is a good one. For example, judges should be permitted to allow troubled homeowners to modify the terms of their mortgages so that payments are more affordable. They now can on farms, and commercial real estate but not on residences. The judges should be allowed to lower interest rates, extend the term of the loan or forgive part of the debt. Another alternative would be to adjust the principal of the loan to match the current market value in areas where real estate prives are rapidly falling.

Lenders, of course, balk at such suggestions and state that they would have to make loans much harder to get in response. In truth, however, lenders would be far better off with a written-down value that matches fair market value, than they would be with the liquidation value they get after foreclosure. They need to wake up and smell the coffee and forget about ‘business as usual’ during this current crisis.

The argument that says we shouldn’t have any sympathy for borrowers that bought a home they really couldn’t afford is only partially reasonable. In many cases, they were hoodwinked by unscrupulous brokers whose aggressive chasing after a carrot on the end of a stick encouraged these deals. In still other cases, lenders and their representatives failed to determine what the loan applicant’s could afford and, in some cases, even falsified their credit standings to allow the borrower to qualify.

And, yes, some borrowers knowingly got in over their heads. However, some reasonable investigation into their real financial situations and credit histories before the fact could have prevented many of these as well.