3 Changes That Would Fix the Foreclosure Market

Posted on October 13, 2009
Filed Under Foreclosures | Leave a Comment

Although this recommendation might not be politically correct, some people think lawmakers should make changes that would hasten — rather than extend — foreclosures for borrowers. Doing so would eliminate some uncertainty in the market, by ending the pain more quickly.

This would also reduce lenders’ losses, allow homes to transition to borrowers who can afford the mortgage payments, and ultimately help to more quickly break the vicious cycle of declining home prices.

Three changes would help accelerate the processes to dislodge borrowers who have neither the desire nor the financial ability to stay in their homes:

First, lawmakers and lenders could do more to promote “deed-in-lieu of foreclosure” programs. These programs allow the borrower to leave the house amicably and simply turn the keys over to the lender. The lender will typically forgive any debt that exceeds the value of the house.
Some borrowers will need further incentives to agree to this program. The 2007 law to make forgiveness of mortgage-debt tax exempt was a great start, but more can be done.

Lenders sometimes offer cash payments to the borrowers to help cover moving costs and other up-front rental costs. Lawmakers could make such “cash for keys” payments to borrowers exempt from taxes. They could also strengthen laws which make it a crime for borrowers to strip a home of appliances and other real property before vacating the house.
Second, state legislatures could reduce the “right of redemption” periods in the 10 states that have them. During these periods, a borrower has the right to reclaim the house even after foreclosure, by paying the outstanding balance of the loan and certain expenses.
Redemption periods create more vacant houses and higher loan losses. They also vary widely. For example, the redemption period is 12 months in Alabama, six months in Michigan, 75 days in Colorado and 10 days in New Jersey.
Third, lawmakers could provide tax incentives for investors who buy rental properties. Tax incentives for investment rentals, coupled with the recent decrease in home prices, would change the economics for this class of investors. Those waiting for the bottom of the market and sitting on cash would be prompted to act.
Renewed activity in this market should translate to lower rental rates and an increase in the demand for houses, and ultimately add stability to the market.

The recent housing bubble and mortgage problems weren’t created overnight, and it will take several years to deal with the aftermath. We are well on our way toward establishing an environment that will facilitate the market recovery.

Lawmakers should not overreact with radical changes that could cause more harm than good. Rather, they should tweak existing laws and allow market forces to work. Do you agree?