The Foreclosure Pain May Last Years

The U.S. housing market could prolong the recovery of the economy by delaying defaulted home loans. This has been a heated topic of debate over whether it is best for America to deal with millions of foreclosures immediately, or to control the process over several years. The major argument for allowing the processing foreclosures to all happen quick, is that there will be a purging of bad loans followed by the beginning of the mending process for the industry. The opposing argument is that by slowing the foreclosure logjam, the economy and housing demand will have time to recover. It appears as though we are taking the latter course, for better or worse.

After the housing market crashed, economists have predicted an uncontrolled surge in foreclosures. "Like everyone else, I've been waiting, but we're not seeing the big influx that was expected," said Jim Summers, an agent with Re/MAX Golden Empire. "At this point, I wouldn't bank on anything." Many real estate experts now say it's not clear that the massive second wave will even come. This would mean that the approach we are taking appears to be successful. Of course, foreclosure's are not in anyone's best interest because they drive down home prices, and keep banks skiddish about their lending practices. Right now, mortgages are much more difficult to obtain as a result of an over-conservative lending psyche

The government is trying to control the downward pressure on the nation's economy that the millions of foreclosures have caused. Banks are fighting to keep value of their mortgage assets high, and cities don't want their communities to suffer the massive losses from California mortgage defaults. "As long as interest rates stay low, I think banking and government interests will be able to maintain some degree of market stability," Conway said. The home foreclosure process now takes twice as long as it used to. A large reason for the longer delays are loan modification efforts to keep borrowers in their current home mortgages. These loan modifications are a noble effort in the short term, but a majority of them default on their modified mortgage within a year.

The foreclosure process is also being slowed by staffing shortages at lending agencies and bankruptcy filings. In states where foreclosure is a judicial process, it now takes an average of 2 years, and in other states it takes an average of 14 months. The slow foreclosure process has two consequences. First, it keeps families in the home longer during the foreclosure process, which is good for any troubled family. However, this is costly for banks, and it is slowing down the economic recovery, possibly by as much as 5-10 years. Regulators insist that banks have an incentive to sit on defaults for a while rather than enforce foreclosure. When lenders have foreclosures on their books, they bulk up reserve funds to cover toxic assets. after the dust settles, and foreclosures are less prevalent, they will have the liquidity to lend again. Until mortgage lenders feel comfortable with their liquidity, and have legislative support, they will not finance the number of loans to meet the demand of prospective home buyers.