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by Jennie S. Bev

The foreclosure moratorium, which basically banned foreclosure sales and evictions for mortgages funded and securitized by Fannie Mae and Freddie Mac, ended on March 31. It came with many consequences: the good, the bad and the sexy. Loan restructuring is the last resort for most homeowners, but why is nobody getting any?

Some have taken the liberty of extending foreclosure moratorium. The state of New York is processing a bill that would extend the moratorium to one full year, and Marshall & Ilsley Corp. announced it has extended its foreclosure moratorium with an additional 90 days through June 30.

Fannie and Freddie owned and securitized half of the $12 trillion mortgage market. Lifting this ban means homes lining up for the foreclosure process are set loose speedily. This would create an enormous supply nationwide.

For instance, in Mountain House, which is the most “underwater” region in the nation, sales of homes went up to 61 in the first three months of 2009, compared with 23 in the same period last year. Such an upward swing occurred, of course, during the foreclosure moratorium period. Price per square footage, however, has gone down from $171.11 to $123.99.

Some banks have accelerated the approval for short-sold homes, to as soon as 10 days. Buyers, however, have been bidding up not simply because inventory was low during the moratorium period, but also because banks are getting more stringent in approving loans. Banks prefer to deal with buyers with the largest down payment, the largest in savings and the least contingencies.

Buyers with FHA loans and small down payments are less likely to be considered, causing them to look for other properties to bid, only to find they are being turned down again and would need to start the whole cycle all over again. This has created a faux high demand. The bidders are likely to be the same buyers.

It is falsely good, indeed, as the housing market is not getting better. In fact, it is likely to get worse in the next few months, or even weeks. Mountain House, with 90 percent of its properties valued less than their mortgages, serves as the best (or worst?) case study of mortgage tsunami. Many homes are valued at less than half of their purchased value. For instance, a four-bedroom single-home residence bought for $625,000 in 2005 now is worth a meager $210,000.

Fannie and Freddie have created renters program for homeowners to stay in their foreclosed home while waiting for a buyer. Other banks have also imposed this renting-while-waiting program. For the long term, the rental program is likely to provide the leeway needed by homeowners to get back on their feet. Many activists believe that instead of evicting homeowners, the rent-to-own program might be the answer to turn this belly-up housing economy around. Now it’s something sexy to consider.

In the midst of loan modification hopes, Bush’s 2008 Hope for Homeowners Act of $300 billion and Obama’s Making Home Affordable Plan of $75 billion have not properly trickled down, because of a fear of lawsuits among lenders and lack of detailed underwriting guidelines. With some mortgages leveraged for 30 times or more, a gridlock has been created. Lenders have experienced some technical difficulties in locating notes and in convincing investors to approve such plans.

With these issues in mind, some banks have extended the foreclosure moratorium to work on loan restructuring, which includes refinancing and loan modification.

In some extraordinary cases, bankruptcy judges have reduced mortgage principals based on current market value, though the 2005 reform is known to benefit banks over consumers. A new bill that would allow bankruptcy judges to modify mortgages has been frozen in Congress, though funds from Troubled Assets Relief Program have been distributed to banks as a part of the rescue plan.

Analysts say the stringent 2005 bankruptcy law reform has contributed to the upsurge of foreclosures. On the flip side, consumer spending is required to boost the economy, thus a speedy process of bankruptcy is preferred. With a “clean slate,” debtors can rebuild their credit and contribute to the economy again.

So does lifting the foreclosure moratorium and loan restructuring process give false or real hopes? Things may look quite sexy for now, but how about the future?[] 

Tracy Press, April 25, 2009

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