As the mortgage crisis continues and foreclosure rates continue to increase, different solutions to the problem have been suggested. A recent article in The Economist sets out both the problem faced by homeowners and potential solutions. As home prices continue to decline and adjustable rate mortgages begin to squeeze homeowners, many consumers have decided to simply turn their keys back in to the mortgage company and face foreclosure and many times eventually bankruptcy.
The data look grim. Foreclosure are up 90% from last year. Average house prices fell by almost 10% in 2007, and the decline continues to accelerate dramatically. The decline in home prices, combined with the exotic mortgage products “hawked” over the last five years has lead to the phenomenon wherein many homeowners actually owe more on their homes than they are worth. If housing prices continue to fall, the number of foreclosures could increase even more dramatically.
The dramatic increase in foreclosures has triggered severe banking losses and an ensuing “credit crunch”. Losses posted by lending institutions have been in the billions. The most public of these institutions has been Countrywide, but all are being effected. As adjustable rate mortgages began increasing the monthly payments of homeowners, the foreclosure rates increased. As the Fed has begun to cut interest rates, the dramatic increase of these payments has lessoned some, but the problem still remains.
As more consumers choose to voluntarilly surrender their homes to foreclosure and file bankruptcy, some have suggested amending the current bankruptcy laws to allow judges to modify mortgage interest rates. Even if such a law is passed, it would likely benefit only a small number of debtors. Adjusting the interest rate does not solve the problem of decreasing home values or the fact that some homeowners simply cannot afford the monthly payments on their homes. Adam Levitin and Joshua Goodman have written an article on the possible effects of stripping down mortgages in bankruptcy.
Although several solutions have been put forward, the problem still remains and continues to worsen. More homeowners are facing foreclosure and eventually bankrutpcy. The full effects of the mortgage crisis will not be known for a few more years.
If you have questions about your mortgage, foreclsoure or bankruptcy, please contact me.