Will the New Foreclosure Prevention Method Prevent a Million Fore
You may have heard recently about the data that shows approximately one million homes that were supposed to be foreclosed on in 2011 weren’t due to slow or stalled foreclosure processingon the part of lenders wary of committing even more foreclosure fraud. Instead, these homes are set to be foreclosed through the end of 2012 because they will likely not be able to make payments and will have to be foreclosed at some point.
You can imagine what this would do to the market, just now starting to recover in some places. A million foreclosures that enter the market roughly at the same time over the course of 9-12 months would essentially act as another wave of foreclosures like the previous waves we’ve experienced over the last four years.
By comparison, approximately 3 million homeowners received a foreclosure notice in 2009, one of the worst years on record for foreclosure filings. This would be one-third of that amount, still a sizable number.
In light of this development, the Treasury Department is considering what could be its latest solution to preventing as many of these impending foreclosures as possible. To put it simply, the federal government is considering changing the terms of the contracts behind private-label mortgage-backed securities so they can force principal write-downs.
In other words, many loans granted by private lenders (and not secured by the government) are used in creating mortgage-backed securities. Writing down the principal owed on many of these mortgages would make them more affordable for homeowners, so it is more likely that they would keep their homes. The catch, though, is that such an action would entail changing the terms of the agreements that created the securities, which presently do not allow for principal deductions.
Will this work? It is hard to say, and trying to make a guess at this juncture is like – you guessed it – flipping a coin. The measure would only impact approximately 20% of the mortgage-backed security market, or roughly $1.36 trillion. It would also require new investors to pick up these distressed properties – with the knowledge that some of them may never work out.
So there are a host of issues with the proposal; some will be resolved, and some will be ironed out as best as possible. In the end, even assuming, optimistically, that the program takes care of all one million foreclosures, that is still only a portion of foreclosures that are pending.
Remember: That one million figure is for foreclosures that are going to be delayed or pushed back. There are still an estimated one million foreclosures filings that have either already been filed or will be
filed in 2011, so you are looking at roughly only half of the foreclosures in the market to be impacted.
Investors and homebuyers looking to use this development to determine what to do should assume that foreclosures will enter the market as usual and, at best, hover around the one million mark for 2011. Chances are, if you were going to buy before, you probably will be better off buying now.