Foreclosure Postponement is Not Solving the Problem in the Long Run

Foreclosure postponement is not solving the problem in the long run and this has been the pivotal point of concern for the Obama team trying to prevent the menace. With each passing day this concern is being proved to be true.

There were 930,000 foreclosure postings in the first three months of 2010 showing a spike of 7% from the last quarter of 2009 and 16% increase from the first quarter of 2009 as per the findings of RealtyTrac. It seems that shadow inventory of foreclosures waiting in the wings are now entering the stage.

The official government figures are not hopeful either. According to the Treasury in March about 228,000 loans were permanently modified. Another 108,000 are waiting to reach this permanent status. It is an increase from last February but still many, many miles behind the original target of the HAMP plan. At the moment about 6 million borrowers are delinquent for over 60 days.

Reports released by three groups overseeing the programme have criticized the government in its flagging efforts. It has been forecast by all of them that the target would be far behind. There is slim chance of 4 million borrowers being helped by the close of 2012.

Last Tuesday (13th April) representatives of JPMorgan Chase and Wells Fargo testified before a panel set up by the Congress saying that they were willing to fully go ahead with the latest foreclosure prevention steps of the government.

The changes were announced last March. It has asked lenders to expedite modification of mortgages that are in trouble but reducing the principal amount. This will bring back some equity to the homeowners while bringing down the monthly payments.

But the bankers are not willing to bite the bait. They are objecting to principal reductions on a large scale although the administration is focusing on extreme cases and laying down various other restrictions on eligibility. This latest stand by the lenders is justifying previous suspicions that voluntary negotiations is not working and will not in future.

The hearing honed in on a specific hurdle to large scale loan modifications. Investors inclusive of pension and mutual funds generally are the first mortgage holders while the banks hold the second liens. The investors think that prior to modification the second lien amount should be brought down but the banks are not agreeing to this and creating hurdles.

Some of the investors – especially Black Rock group are now calling for a bankruptcy special process to solve this stand off by the banks. In this case the courts would reduce the principal of the bankrupt borrowers and bring it down to manageable levels.