11 Million Homes at Risk of Foreclosure


Could 20% of American homeowners be thrown out on the sidewalk?

“Absolutely” says one housing industry firm – especially if Congress doesn’t change its policy on mortgage modifications. But a move in the right direction – especially toward “re-equifying” delinquent homeowners - could limit foreclosures.

The data comes from Amherst Mortgage Insight, which said in its Oct. 1 report, The Housing Crisis – Sizing the Problem, Proposing Solutions, that drastic action is needed to head off a major catastrophe in the U.S. real estate market. In addition, it says, the window for action is closing – and fast.

From the report:

“The housing market is quite fragile. This is underscored by the two latest existing home sales numbers - 3.85 million units in July, 4.13 million units in August, the lowest prints on record since the National Association of Realtors (NAR) began the series in 1999.

If the government's policy does not change, over 11 million borrowers are in danger of losing his or her home (one borrower out of every five). Politically, this cannot happen. The government will attempt successive modification plans until something works.”

What steps should Uncle Sam take to avoid a real estate meltdown? Amherst’s analysts say the key is to add some muscle to current loan modifications by adding “principal reductions” to the mix.

The Amherst report points out that while big banks like Bank of America (Stock Quote: BAC) are already including principal write downs in their mortgage loan modifications, the impact on the market will be only marginal unless government sponsored entities (GSEs) like Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRE) take the same path.

“While Bank of America is already forgiving principal, it is our fear that the program is not gaining widespread traction,” the Amherst report says. “Scuttlebutt has it that several large originators have said they will not implement this program unless the GSE’s do so.”

The notion of forgiving some of the debt incurred by struggling homeowners – but not those who are current on their payments – isn’t a “moral” issue, but an “economic” issue, Amherst says.

“Few borrowers walk down the street with their Starbucks in hand, thinking ‘it’s 3 p.m., thus time to default,” Amherst says. The best path to keep more Americans in their homes to is to raise the costs of strategic default (when “underwater” homeowners walk away from their toxic mortgages) and lower the cost of remaining in a home.

The key is to cut the principal owed on a home that may otherwise fall into foreclosure. Amherst doesn’t explicitly say by how much, but 20% or so off an underwater mortgage could mean the difference between the mortgage holder being tossed from his or her home and having the homeowner keep it.

Amherst says that mortgage lenders should be on board for this idea – it costs them a bundle to foreclose a home, so a principal write down is actually more affordable. It’s an intriguing idea, and one that might well get the attention of Congress if home foreclosures continue to threaten the health of the U.S. housing market.

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