And sadly, lower- and middle-income families have suffered the most. As a result, the foreclosure crisis has initiated several legislative proposals, but so far, no consensus has emerged.
A Grim Scenario
The fall in home prices has continued unabated. In the last three months of 2007, prices dropped by 1.3%. Houses which had commanded a price of $550,000 during the housing boom are now worth about 40% less.
And, as prices fall further, more and more people will face foreclosures.
Pessimists fear that the trend could lead to banking crisis by spawning as much as one to two trillion dollars in financial losses.
The Government’s Response
The government has been slow to respond to the crisis. Some officials have expressed concerns that bailing out troubled borrowers would encourage future borrowers to take on too much debt.
Some argue, however, that that may be the wrong assessment of the crisis. The causes of the housing bust, they say, are rooted in lenders’ failures to vet borrowers and the government’s failure to regulate the industry.
Considering foreclosure rates’ strong effects on crime rates and the tax bases of municipalities, the government needs to initiate an action plan to contain the socio-economic costs of foreclosures.
Different Approaches to Stemming the Crisis
All the propective solutions, however, are fraught with certain problems. The situation demands a plan that is comprehensive, bold, and fair to deal with the nation’s foreclosure crisis.
The focus of any solution should be on measures which can facilitate settlements between homeowners and their creditors to prevent unnecessary foreclosures.
The government’s direct intervention in mortgage markets, on the other hand, could create delays and burden taxpayers.
Any federal aid should be directed toward those segments of society that are most affected by foreclosures. A federal loan modification program should stipulate measures to ensure that a replacement loan’s principal balance does not exceed the property’s appraised value.
In addition, to help those homeowners who do not have sufficient incomes to qualify for new financing, a federally financed land bank should buy a given property from a lender at a high discount and then rent it to the former homeowner.
It would also make more sense if the costs of any loan modifications are borne by the lenders. In those cases where loans have been packaged into securities, then the investors, who are in the best position to profit from them, should bear the cost.
Introduction of these measures may bring some sense stability to the market and instill confidence in frightened homeowners.
The Message
The foreclosure crisis is a tragedy for individual homeowners, a calamity for the markets, and a serious concern for the government.
The message that emanates from this mess is clear — until and unless we get rolling as a nation, we cannot prevent significant damage to our markets and society.
