Providing Alternatives to Mortgage Foreclosure: A Report to Congress, 1996

Authors: Capone, Charles A., Jr    

A new HUD study of alternatives to mortgage foreclosure urges greater uniformity among State foreclosure laws and calls for agencies to provide better incentives for loan servicers to initiate loan modifications and forbearances. Providing Alternatives to Mortgage Foreclosure: A Report to Congress, from HUD's Office of Policy Development and Research, reviews current foreclosure laws, investigates the use of various avoidance procedures, and cites areas for continued improvement.

The report notes that some States permit quick foreclosure, which acts as a disincentive to loan workouts. It recommends that credit risk-bearing agencies, such as Fannie Mae and Ginnie Mae, provide better incentives for loan servicers to initiate loan modifications and forbearances.

The report also urges statutory changes to give the Secretary of Housing and Urban Development broad authority to implement cost-saving foreclosure avoidance strategies that could help keep more borrowers in their homes while protecting the soundness of the FHA insurance fund. Although more than 70 percent of homeowners who become 3 months delinquent on their mortgages can remedy the problem on their own in an additional 1 to 2 months, 3 million American families have experienced a foreclosure on their homes over the past 15 years. Available evidence suggests that the cost of helping a borrower overcome a default is minimal compared with the costs associated with foreclosure. However, the mortgage industry -- including Federal insurers of mortgage credit -- has not yet reached consensus on the best way to remedy seriously delinquent loans.

The chances that a delinquent homeowner will face foreclosure has dropped 10 to 15 percent in the past decade, mainly due to industry innovations in handling threatened foreclosures. These include forbearance for borrowers with temporary income losses, loan modifications for borrowers forced to take lower paying jobs, pre-foreclosure sales, and voluntary deed conveyances for borrowers under extreme hardship. As use of these alternatives increases, the drop in foreclosure since the 1980s could double, the report estimates.

HUD, however, has been constrained by statutory and judicial mandates to use loan assignment as the principal method of borrower relief for insured mortgages. Assignment has proven to be a costly option for both borrowers and the Department, the report notes. Many borrowers with assigned loans ultimately acquire a level of debt beyond their ability to pay. Without the statutorily required emphasis on loan assignment, HUD could help more troubled borrowers through the less costly alternatives mentioned above. Under the current system, HUD spends a large amount to manage one-fifth of its seriously delinquent loans.

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