The California Senate just rejected a bill that would force lenders to pursue a loan modification before initiating the foreclosure process. Ostensibly it was an attempt to forestall the robo-signing fiasco revealed last Autumn in which bank personnel were simply signing foreclosure documents without properly reviewing them. This was done because they were so swamped with delinquencies that bank personnel simply didn’t have time to carefully review every case. For many homeowners on the edge who might have saved their properties by other means this was a devastating disappointment. It must be said that in this fiasco the banks bear the responsibility as there was nothing preventing them from ramping up a trained work force when they saw the crisis break in 2008 and 2009. They economized instead and “mistakes were made” as a result.
That being said, it remains sadly true that the majority of attempted modifications fail because the homeowner simply no longer qualifies for the loan. It makes no sense for the bank to modify a loan for, essentially make a new loan to a consumer who does not qualify. Yes, suddenly they’ve realized that. Even after successfully modifying their loan a majority of homeowners default again in 6 months. So I can see the banks’ point, why go through the effort and expense to modify a loan in such an unfavorable environment?
Ultimately the best thing for the housing market, as I’ve been saying ever since the housing bubble collapsed, is for the bad loans work their way through the system as quickly as possible. This means that people who should not have received loans in the first place will go back to renting and those who got caught in bad loans can get free of them and get themselves set to buy again in as little as two years. Prices, which rose to ridiculous levels, need to come down to where buying a home is just a little more challenging than renting. The foreclosure process is the the most efficient way of accomplishing this goal. Unfortunately this is going to be painful, and the state of the overall economy is not helping. Eventually, though, it will work itself out and we’ll get over collective housing hangover.
However having said that the foreclosure process is the most efficient in the long run for the housing market, doesn’t mean that it is the best for the individual home owner. Foreclosure is a devastating process, and can cripple those caught up in it economically for many years. For those responsible home owners who have been able to drag themselves from a certain Egyptian river there are other workable remedies.
Banks are going to continue to foreclose at the current rate, far below the actual number of non-performing loans on their books for years to come. They continue and will continue to dribble out the foreclosures at a pace that will not crash the market. Despite the huge number of toxic mortgages on their books these represent a small fraction of their total portfolio, the vast majority of mortgages continue to be paid on time. They can afford to wait. This has given a lot of homeowners of distressed properties a false sense of security. Like the turkey who on the Wednesday before Thanksgiving is convinced that he will be fed on the morrow just as he has been for the last year or two, many homeowners who have not made a payment in months or even years will be shocked when the ax finally falls. And it will fall. The aftermath for them will be even more humiliating and painful than for the turkey.
