The wave of foreclosures that has been growing for the past two years continues to swell and experts fear that the flood of foreclosed homes hitting the market during the coming months could derail the recovery in housing that appears to be underway. It is estimated that at current sales volumes, it would take over a year to sell the inventory of foreclosures in the US. Current estimates pin the number of foreclosures that will soon be on the market at 7 million units. The vast majority of foreclosures are in California, Nevada, Arizona, and Florida, but the foreclosure issue effects home values in every state.
There are a variety of methods being used to reduce the number of foreclosures hitting the market and to help struggling homeowners either stay in their homes or get out from under their homes that are currently underwater. Here are some of the methods being used to address the growing wave of foreclosures.
– Loan Modification: Many lenders, at the urging of the federal government, are working with borrowers to adjust their monthly mortgage payments by altering the terms of their mortgage loans. Loan modification programs have been underway for several months now but the progress has been slow. Lenders aren’t eager to work with struggling homeowners in spite of the fact that modifying loans is saving the homeowner in many cases from walking away from the home outright. Of the homeowners that are eligible for loan modification programs, only 12% have currently had their loans modified. Millions of homeowners are still on the brink of foreclosure, which will likely mean more short sales in the coming months.
– Short Sales: A short sale is the sale of a home for less than the amount owed on the mortgage. The lender in a short sale has to agree to accept the sale price as full repayment of the loan—something banks have been slow to agree to with the massive losses that they have already taken in their loan portfolios. Short sales are also notorious for having a very long selling cycle because banks take so long to approve proposed deals that many buyers simply walk away. The Treasury said this week that they expect short sales to be a better alternative than foreclosures and will lend support to lenders that accommodate short sales.
– Treasury Support: All of the programs that are being used to help struggling homeowners can’t work nearly as well without the backing and support of the government and the Treasury has made it clear that they will work with lenders that are willing to work with borrowers. Last week, the Treasury committed $10 billion to helping lenders in areas where prices are continuing to fall. The Treasury has also instituted other programs for lenders, including a $1000 payment for every short sale they process. This won’t make the lender whole, but the losses in a short sale to the lender should be smaller than the losses associated with a foreclosure. The program won’t eliminate foreclosures entirely, but it should provide incentive for at least some lenders to work more cooperatively with their struggling borrowers.