Foreclosure Bail Outs, Have They Helped?

Today the Federal Housing Finance Agency announced it will be encouraging Fannie Mae and Freddie Mac to work with banks and their servicing departments to assist delinquent home owners in modifying their home loans. They are also requesting a moratorium be placed on foreclosure proceedings where the home owner is communicating with their servicing lender. Fannie Mae and Freddie Mac will be encouraging the servicers with an $800 payment to them for each modification they make. For the past year there have been many bills passed to basically stop the bleeding of the national real estate market. Many of those bills have either proven to be ineffective or worse, worthless. This bill is at least a move in the right direction. In reality the bail outs have not been the root of the solution, yet it’s been the lenders that have been modifying borrowers loans out of their need for self preservation.


Let’s first look at a few key issues. Home values were supposed to be of little importance, having little impact on the economy. These words were spoken by Greenspan over two years ago. Many economists expressed the same sentiment. The Fed’s position over the past few years has been to sit back and watch and only when pushed into a corner would they come out with legislation. The collapse of the economy was inevitable as the same Federal government allowed the banking industry to dig itself into a hole unchecked. Much of the content of many of the bills of 2008 have contained verbiage that suggests lenders work with their borrowers in default. Banks have already been doing this. The moratorium on foreclosure proceedings suggested by today’s statement from FHFA Director James Lockhart is NOT new to the industry. Wells Fargo is amongst many banks that have had moratoriums on foreclosing for at least this past year. The servicing lenders will be modifying loans only when it suits them as there is nothing mandated for banks to comply.


Something should have been done sooner, much sooner. It is my opinion that there are and have been better ways to repair some of the damage to our economy. The troubled real estate market is the main reason for the economic recession. Our tax dollars, to the tune of a trillion dollars, are now being used to recapitalize banks. These are the same banks that are at the root of the problem. So, our tax dollars are being directed by politicians and economists, most whom have been in office throughout the past several years. A trillion dollars, let’s take another look at another way a trillion dollars could be used to assist in a recovery. Instead of giving the money to the banks the OFHEO should’ve created an office that would bail out home owners directly. Figuring there may be around 20 million home owners in trouble, the pool of money would’ve been worth $50,000 for each home owner. Most default situations could be cured with less, some needing more.


Now, how would that help, and isn’t it still robbing from the rich to give to the poor, or socialism at its finest? Sure, but since our tax money will be used regardless it might as well be used effectively. The reason why this would work is that it would put an immediate halt to all defaults and foreclosures. If a borrower was allotted an amount of money that would reduce their principal amount along with the lender modifying the loans terms, much fewer REO and Short Sale homes will be entering inventory for sale. This has an immediate affect on home values. Less inventory along with the availability of many viable home loan programs will provide a turning point. It’s the basic law of supply and demand. Over 70% of all listings in the state of California are distress situations.


Unfortunately, the home owners that have acted responsibly over the past half decade have to sit back and watch as their home’s value has been cut in half in many neighborhoods due to the acts of the irresponsible and now have to watch as the taxes they pay are used to bail out the irresponsible parties.


To prevent the transgressions from reoccurrence the Fed should create a council that would work on implementing national certification or licensing for any persons working directly with borrowers. It is extremely unfortunate that thousands of loan officers with no license or formal training were allowed to assist people in their most financially significant transaction of their lives. Also, that same council should have the task of reviewing every loan program and certifying their safety. Loan programs should be graded on risk, complexity, and the potential or likelihood of misuse. Loans like the Pay Option Arm should’ve never been made available to the general public. It was a loan for gamblers, not the average homeowner, but unfortunately the Fed turned a blind eye to this program for the past 20 years.


Basically, the FOMC regulates monetary policy. There should’ve been a bill to change their responsibilities long ago to include real estate as a part of their oversight. Ultimately it fell on their shoulders anyway.


Look for a positive 2009 after a slow start. Second and Third Quarter real estate sales will very likely be stronger than expected as many buyers have been waiting for two years for the bottom to hit. The lower amount of foreclosures and short sales will help to increase sale prices and maybe once again the average home owners may begin to see their homes gain equity.


Jason Shapiro


Quality Funding


My two cents with interest…

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