Tag Archives: foreclosure crisis

Post-Bubble Foreclosure-Prevention and -Mitigation Options in Your Town?

Posted on by

Bob Hockett has posted Post-Bubble Foreclosure-Prevention and -Mitigation Options in Seattle. I recommend it to those interested in issues beyond Seattle’s borders because it actually covers foreclosure-prevention and mitigation options across the country, although it looks at them with a Seattle focus.

He argues that

There is a potentially bewildering array of means available to at least some underwater homeowners, and these programs are also noteworthy for failing to solve the fundamental problems affecting these mortgages. There are three vitiating weakness share by nearly all of these means . . ..

The first weakness among currently available options is that they do not concentrate upon mortgage principal-reduction, meaning that they do nothing about the underwater status of underwater mortgage loans – which is the principal predictor of default and foreclosure – at all. Instead they rely upon temporary forbearance, term-extension, or interest rate reduction. . . .

The second weakness of the currently available options is that they are voluntary from the creditor’s point of view. That is problematic not because creditors lack in appreciation of their own enlightened self-interest or in desire to do the right thing, but because where there are structural or contractual barriers to principal reduction, as we shall see there are here in abundance, even creditor-benefiting such changes cannot occur on an adequate scale. Creditors are very often unable to do what benefits themselves and homeowners alike, meaning that voluntary programs can be useless.

Finally, the third weakness that the options discussed here suffer is that they do not extend to underwater PLS loans, which, as seen above, constitute the great bulk of troubled mortgage loans; they are in general available only to GSE and bank portfolio loans . . .. (11)

I found the review of “publicly encouraged debt relief” programs useful. (14) They include

  1. HAMP (the federal Home Affordable Modification Program)
  2. HARP (the federal Home Affordable Refinance Program)
  3. Miscellaneous Specialized HAMP Analogues
  4. FHA Short Refinance Program
  5. HAFA(federal Home Affordable Foreclosure Alternative)
  6. “Hardest Hit” Fund & Program (Treasury)
  7. HOPE NOW Alliance
  8. The Attorney Generals’ Settlement

Hockett also proposes some innovative approaches that he suggests that Seattle should consider including the use of eminent domain as well as a land bank. Worth the read.

 

Leverage and the Foreclosure Crisis

Posted on by

Dean Corbae and Erwan Quintin have posted Leverage and the Foreclosure Crisis to SSRN (behind a paywall; available here for free). They ask how “much of the recent rise in foreclosures can be explained by the large number of high-leverage mortgage contracts originated during the housing boom?” (1) Their model and counterfactual experiments suggest that “the increased availability of high-leverage loans prior to the crisis can explain between 40% and 65% of the initial rise in foreclosure rates.” (1)

In their introduction, they note that
The increased availability of loans with low downpayments made it possible for more households to obtain the financing necessary to purchase a house. At the same time however,because these contracts are characterized by little equity early in the life of the loan, they are prone to default when home prices fall. Not surprisingly then, mortgages issued during the recent housing boom with high leverage have defaulted at much higher frequency than other loans since home prices began their collapse in late 2006. (2, citations omitted)
Their finding are, as they note, not so surprising, although it is interesting to see them try to quantify the effect of low-downpayment mortgages.
More importantly, their paper will help inform the ongoing debate as to whether federal regulators should impose strict down-payment underwriting requirements upon lenders or whether they should allow lenders to develop more dynamic underwriting models for which downpayment requirements are just one factor.