At Tuesday’s House Committee on Financial Services hearing titled “The Private Sector and Government Response to the Foreclosure Crisis,” Julia Gordon, senior policy counsel for the Center for Responsible Lending, painted a bleak picture.
According to Gordon, 6 million foreclosures were initiated since 2007. Six-and-a-half million more homes are “at risk” right now–with homeowners more than thirty days behind on their mortgage or already in the foreclosure process. This year, American households will lose $500 billion in equity as a result of foreclosures in their neighborhoods.
“Without significantly more intervention to stop foreclosures, by the time this crisis abates, as many as 13 million families will have lost their homes,” said Gordon.
Laurie Goodman, senior managing director at Amherst Securities, agreed. Goodman said in the third quarter this year over 14 percent of borrowers–7.9 million homeowners–were not making mortgage payments.
“We estimate that approximately 7 million of these 7.9 million homeowners will be forced into vacating their properties,” she said. And that “does not include the 250,000 new borrowers per month who are going delinquent for the first time.”
Goodman said “negative equity”–also known as being “underwater,” owing more on one’s mortgage than the home itself is worth–is “the largest single problem” in the foreclosure crisis. Indeed, 25 percent of homeowners are now underwater.
“Most borrowers don’t default because of negative equity alone,” she said. “Generally, a borrower experiences a change in financial circumstances, misses a payment on their mortgage, and then re-evaluates their financial priorities. If the home has substantial negative equity, they will choose to walk.”
In Goodman’s opinion, the administration’s modification program is “destined to fail” because it doesn’t address negative equity.
According to Gordon, the Department of Treasury’s Home Affordable Modification Program (HAMP) was supposed to help 3 to 4 million borrowers. But after nine months approximately 650,000 homeowners are in a trial modification, and “only a small fraction” of those have received a permanent loan modification.
The modifications fail to take into account the homeowner’s full financial picture–including second liens on a property or credit card debt–and they tend to be reductions of interest rates rather than principal modifications, so the homeowner still faces huge negative equity.
“Servicers generally make most of their money from their monthly servicing fee, which is a percentage of the outstanding loan principle balance, so they don’t want to write down the principle balance,” said Gordon.
Finally, HAMP aims to structure a mortgage payment that is equal to 31 percent of a borrower’s income. But Georgia Democratic Congressman David Scott said that is too much in many cases.