Proposed Solutions May Prevent Future Mortgage Foreclosures

Posted on October 23rd, 2007 by saman

The current subprime mortgage meltdown has already cost US homeowners equity losses in the billions. In the wake of this crisis, there have been proposals to both help homowner’s currently facing the loss of their homes as well as to curtail future losses from unsustainable mortgage payments and growing arrearages. Basically, these include:

Providing Help For Homeowners Approaching Default

There are reasonable solutions for people on the verge of losing their homes if they’re only put into place before it’s too late. Regulators who can bring about relief, are being asked to take steps that will ban unscrupulous and predatory lending and servicing practices that result in subprime loan failures. Outreach programs for delinquent borrowers must be developed to provide financial counseling and restructuring of mortgages to permit arrearages to transfer to the loan balance and times to be extended so that monthly payments are again affordable. Loans can also be converted from adjustable rate mortgages (ARMs) to conventional, fixed-rate loans. Many states have stepped in to help by enacting new laws that ban foreclosure ‘rescue” scams where predatory lenders target homeowners in trouble.

Creating Means For Delinquent Homeowners To Repay Their Loans Without Requiring Foreclosure Or High-Pressure Refinancing.

This requires that subprime lenders make certain that borrowers can afford their loans or other remedies will not work. Applications must be thoroughly evaluated and applicants must be fully appraised of any terms and conditions that call for payment escalations in near-future years. If they offer loans with interest escalation clauses, lenders must consider whether or not the applicant will be able to afford the monthly payments after any lower-rate ‘teaser’ period expires. Lenders should additionally be required to require escrow payments, proof of an applicant’s income and assurance that the loan offered is economically compatible with the applicant’s financial status.

Establish That All Parties To The Loan Will Operate In Good Faith As Well As That Both Borrower And Lender Have A Stake In The Success Of The Loan

In recent days, several large bank regulators have detailed guidance about the risks of non-traditional mortgage loans. This guidance spells out the risks from improper lending methods and makes it clear that they should apply to all subprime ARM mortgages as well as to other non-traditional loan offerings. They also urge that these principles be applied to every subprime mortgage lender and that brokers be subject to the same standards as other financial professionals with a duty to be certain that loans they recommend are suited to the borrower’s financial situation. Both lenders and real estate appraisers are also required to uphold standards of accurate and independent appraisals. Furthermore, the guidance asks that regulators be required to hold secondary investors to fair dealing standards and not support any abusive subprime mortgages.

Recently quoted statistics state that between 19% and 27% of all subprime mortgage loans originated since 2005 will end in foreclosure. Whether the accuracy of these statistics falls nearer to the high or low end of these percentages, the economic fallout is growing more and more severe. It is time to make suggestions like those above into regulations and laws that can restore sanity to mortgage lending in the United States and elsewhere.