These Government Programs May Have Prolonged the Recession

It took nearly a decade, but the foreclosure crisis created by the housing bubble seems to have finally receded. ATTOM Data Solutions, which gathers information on housing trends, reported that default notices, auctions and bank repossessions fell 24% in September, compared to a year ago. Essentially, that means foreclosures are down to their lowest levels since 2005, before the bubble burst.

“Foreclosure activity has been on a steady slide downward over the past six years, finally dropping back below pre-crisis levels in September,” Daren Blomquist, senior vice president at ATTOM Data Solutions, said, proclaiming the results provide the “nail in the coffin” of the foreclosure crisis.

The timing is probably good for Democrats, as the Obama administration’s program to help Americans facing foreclosure — the Home Affordability Modification Program (HAMP) — was criticized for not helping enough at-risk homeowners. In its first five years, HAMP was supposed to help 3 to 4 million homeowners — but only about 1 million modifications were completed by then. Meanwhile, an estimated 7 million people lost their homes during the recession.

Data crunched by ATTOM at Credit.com’s request raises another potential question regarding HAMP and other efforts to help struggling homeowners: did these programs prolong the recession?

Bloomquist examined five states where banks had an easier time completing foreclosures — we’ll call these the “pull-off-the-band-aid” states — and five other states called “foreclosure prevention states,” where legislation and court proceedings were designed to slow down the foreclosure process.

The results are telling. In the five “pull-off-the-band-aid” states, housing prices are up dramatically from 2008 — an average of 33%. Those states are Arizona (up 10%), California (34%), Colorado (50%), Georgia (26%) and Michigan (44%).

On the other hand, the housing recovery is much slower in the “foreclosure prevention” states. As a group, housing values in those five places are only now besting 2008 levels. They are Florida (up 8%), Illinois (up 1%), Nevada (up 6%), New Jersey (down 11%) and Ohio (up 16%).

Four of those five states are “judicial foreclosure” states, meaning a judge must review each case, which typically slows down the process. Nevada, the exception, passed laws requiring mediation in the foreclosure process, as did several other legislatures in this group. The sluggish recovery in those five states is also apparent from the share of seriously underwater homes. In them, 19% of homeowners owe at least 125% more on their mortgage than their home’s value.

Among that group, Ohio’s property values have risen the most, but 21% of mortgage holders there are still seriously underwater. Standing in contrast, in the “pull-off-the-band-aid” states, the seriously underwater share is 11%.

Bloomquist said the data suggests government foreclosure intervention efforts in the housing crisis failed on both sides.

“Not only did they not do as much good as promised, they actually did some harm in prolonging the pain,” he said. “This harmful effect was multiplied in states with aggressive foreclosure prevention efforts added on to the federal programs. On the other hand, several hard-hit states that did not add many or any additional foreclosure prevention programs on top of the federal government programs have recovered most quickly in terms of foreclosure numbers getting back to pre-recession norms and home prices recovering.”

The data can’t say definitively that slowing down foreclosures during the recession hindered the housing market recovery in those states. But Bloomquist thinks the data is strong enough that it merits consideration by policymakers.

“Yes, there are other factors at work helping to lift the real estate markets in places like Colorado and Georgia, and even Arizona and California,” Bloomquist said. “However, Michigan does not have the favorable demographic trends in place, and Florida on the other side do have more favorable demographic trends. I think juxtaposing specifically Michigan and Ohio and also Arizona and Nevada provides a pretty clear difference between two sets of similar markets.”

It’s important to note that a foreclosure can significantly damage your credit, but that you can repair it over time. You can keep an eye on the progress you’re making in fixing your credit after a foreclosure by viewing two of your free credit scores, updated every 14 days, on Credit.com.

Image: kzenon

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What Happens When HAMP Expires at the End of This Year?

Nearly 10 million Americans lost their homes in the Great Recession. Millions more went through the arduous process of modifying their mortgages, either directly through banks or with the help of federal programs like the Home Affordable Modification Program (HAMP). Still more saw the value of their homes plummet, leaving them underwater and in financial peril.

Many at-risk consumers found themselves in a sea of red tape when trying to take advantage of the very federal programs designed to rescue them and their homes.

But things may be looking up.

Foreclosures have slowed, and the total number of underwater homes has dropped by half, from 11.6 million in 2011 to 4.3 million last year, according to CoreLogic. HAMP expires at the end of the year.

That’s not to say the housing market is out of the water, or that consumers who have trouble paying their mortgages don’t need help navigating the process. Solutions span forbearance and modifications to home-disposition options, and each of these is complicated.

To address the problem, this week the Consumer Financial Protection Bureau issued non-binding guidelines for mortgage services when dealing with at-risk homeowners. (The consumer agency refers to the guidelines as instructions for “Life After HAMP.”)

“We aim to help consumers avoid foreclosures, which upset their personal and financial lives,” CFPB Director Richard Cordray said in a press release. “The modification program was put in place to provide alternatives to foreclosure. Our principles will serve as helpful guardrails for servicers, investors and regulators to consider as we continue to protect consumers who are struggling to pay their mortgages.”

The CFPB believes consumers are on more solid footing today than they were before the recession. New rules, such as stricter “ability-to-repay” requirements, make future mass defaults less likely. However, “there is ample opportunity for consumer harm if loss mitigation programs evolve without incorporating key learnings from the crisis,” the bureau said in its report. To that end, it identified four overriding principals that financial institutions should follow when dealing with at-risk homeowners:

Accessibility: Consumers should easily be able to obtain and use information about loss mitigation options and how to apply for them.

Affordability: Repayment plans and mortgage loan modifications should generally be designed to produce a payment and loan structure that is affordable for consumers.

Sustainability: Loss mitigation options used for home retention should be designed to provide affordability throughout the remaining or extended loan term.

Transparency: Consumers should get clear, concise information about the decisions servicers make.

“Avoiding foreclosure is often in the best interests of both the investor and the consumer,” the CFPB said.

The main goal of the guidelines, the bureau said, is to prevent “avoidable foreclosures.”

In the recession, frustration with HAMP and proprietary lender modification programs was high. Some homeowners saw banks continue foreclosure proceedings even as they were delayed by the modification process. The CFPB banned that practice in 2013, but it shows how frustrating life can be for mortgage holders trying to save their homes. (You can see how a past or ongoing foreclosure may be affecting your credit by viewing two of your credit scores, updated each month, for free on Credit.com.)

“The principles announced today by the Bureau do not establish binding legal requirements but instead are intended to complement ongoing discussions among industry, consumer groups and policymakers,” the report said. “The CFPB believes these principles are flexible enough to apply to an array of approaches, and recognize the interests of consumers, investors and servicers.”

Image: Chris Fertnig

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