Atlanta Real Estate Blog

A recent report by analysts of the Amherst Securities Group LP reported that, if governmental policy on foreclosure prevention does not change, 11.5 million borrowers are in danger of losing their homes by the end of the year. 

The firm’s analysts say, the bottom line is that 20 out of every 100 U.S. first lien residential mortgages are already impaired: 

    - Nine are seriously behind in their payments.

    - Six have been behind and are classified as what Amherst calls "dirty current" because they have been modified. But the firm says these loans are re-defaulting at an eye-popping rate of 50 percent.

    - Five are underwater by more than 20 percent of their current value and are defaulting at a 20 percent per-year-pace.

Additionally, another study by the Center for Housing Policy of the 100 largest metropolitan areas showed 10 percent of mortgages as seriously delinquent (90-plus days late or in the foreclosure process).  In some areas, this percentage was as high as 1 in 4 mortgages.

What's A Politician To Do ?

So how can the administration fix deficiencies in its loan modification program and keep the mortgage default rate from hitting the menacing 20 percent mark?  Amherst analysts say the answer lies in cutting borrowers’ principal balances. 

They argue that the success rate on mortgage modifications can be raised by making greater use of principal reductions.  Amherst says this approach would help to address the phenomenon of strategic default, which is becoming increasingly acceptable among frustrated borrowers. 

Policymakers must first recognize that the inclination to walk-away from one’s mortgage has become an economic issue, not a moral one, according to Amherst. In addition, the costs of default must be made explicit, and the second lien issue must also be addressed. 

Unfortunately, it is unlikely that these foreclosure-prevention policy  changes will be sufficient to address the housing crisis, according to Amherst.  The firm says additional government intervention is needed to boost housing demand. 

Amherst recommends that the government provide leverage for investors to buy real estate, ideally through its federal housing agencies - the Federal Housing Administration (FHA), Fannie Mae, or Freddie Mac.  Currently, Fannie and Freddie credit availability for investor properties is very limited, requiring large down payments and pristine credit, while FHA is for owner-occupied homes only. 

Amherst says just when the market needs to increase demand for homes, demand is actually contracting due to credit availability issues.  The firm’s analysts say new financing channels should be opened up to investors, noting that investors are currently purchasing a disproportionate share of foreclosed properties for cash. 

In addition, Amherst recommends increasing credit availability on prudent terms to borrowers with less than pristine credit. 

The large numbers of borrowers who have defaulted or will default on existing mortgages will, under present programs, be locked out of owning a home for years, but the company’s analysts say this setback can be addressed by re-qualifying borrowers who are in a home they can’t afford into one that better fits their financial situation. 

Tags: 20% face foreclosure, walking away from the mortgage, strategicdefault, principal reduction, restricted credit availability, loan modification, boost housing demand, FHA, Fannie Mae, Freddie Mac, Amherst Securities Group LP, Center for Housing Policy, ATLShortSales.com.