The continuing devastation of the subprime crisis
June 7, 2011
The subprime crisis has spread well beyond the victims of those loans. The residue of the crisis spread to the economy and began to affect those who had lost their jobs, their equity and finally their homes.
All of us have been touched by friends and loved ones who had to leave their homes.
The subprime crisis was caused primarily by the crash of real estate values and not by risky loans. Since then, several variables have contributed to the rise of record foreclosures.
Loan modifications were widely marketed as easy solutions to homeowners facing payment default. As most discovered, a modification is neither easy or often granted. Unfortunately, the marketing of loan modifications attracted many homeowners who believed this was an alternate method of refinancing.
Most of these homeowners were not facing default but were only looking for a way to lower their payments.
These unfortunate home mortgage holders were coached to default on their payments to get their lenders’ attention. When the modification was not approved, they could not afford to bring their payments current. Additionally, many banks filed foreclosure notices against them while their requests were being considered.
It seems that the staff in modification and the foreclosure department were not in communication with one another. Besides having to bring all their payments current, these borrowers were now saddled with a $2,000 foreclosure fee. So, what began as a simple refinance method ended up turning formerly healthy borrowers into foreclosure candidates.
The Home Affordable Modification Program (HAMP), designed by President Obama to provide relief to the housing market, actually increased the rate of foreclosures. The bill was written with the requirement that lenders modify the mortgages of their clients. The public, encouraged by the government’s new law, applied for the HAMP program in the hundreds of thousands.
Again, borrowers were encouraged to skip payments or cut them in half for a prolonged period until the application could be evaluated. The vast majority were declined by the lending community, leaving them in no position to bring their payments current. A large portion of these applicants lost their homes. It is now common knowledge that lenders have no legal requirement to comply with HAMP.
A new mentality regarding home ownership and its responsibilities has also added to foreclosure inventory. A whole wave of homeowners elected to walk away from their homes just because of negative equity, even though they could easily afford their payments. This method is known as “strategic foreclosure,” and this method was not widely used prior to this last real estate down turn. In the past, it was viewed as a moral responsibility to make payments, even in negative equity positions. In today’s environment, it is considered a business decision.
Although short selling is a viable option for homeowners in negative equity positions, it was usually used when homeowners were in distress, i.e. unable to make their payments. Short selling is the new “strategic foreclosure” method visiting the communities of the United States.
As nondistressed borrowers began to use methods that were reserved for the financially strapped, the housing market became flooded with listings and sales that further devastated real estate values.
The commerce department just reported that housing fell another three percent last month alone, four years after the subprime crisis began.
Unfortunately, more pain is ahead. The second foreclosure wave is expected to hit the market in September of this year when payment resets for option arm loans take effect. Most of these “teaser-rate” products were secured in 2006 and will fully amortize late this year.
The contribution of non-distressed borrowers foreclosures has unfortunately added a great deal of stress to an already languishing housing market. Their continued entrance into the market has already extended this housing recession an additional two years by some estimates. Hopefully, all of the new inventory on the market will find enough new buyer demand to turn things around.
Ralph Migliozzi lives in Grass Valley and is the author of “The Foreclosure Game” and “Collateral Damage: Life as a Mortgage Broker”