When dealing with banks on foreclosures or short sales, I often advise my clients to forget about common sense and accept the fact that these transactions rarely make any sense at all. This video is more true than most people would believe… at least until you experience it for yourself.
Treasury is terrified of a flood of new foreclosures. I believe that is why the Treasury issued a directive last week extending the trial modification period to at least the end of January.
There are several possible options:
More short sales. Short sale activity is already increasing, and the Treasury introduced the Foreclosure Alternatives Program to help with short sales and Deed-in-Lieu of Foreclosure transactions. However servicers are very afraid of short sale fraud (non-arm length transactions), and short sales are also distressed properties – pushing down prices – something Treasury is desperately trying to avoid.
Encouraging servicers to write down principal. This would be very expensive, and if paid for by taxpayers – it would be very unpopular because it would appear to favor speculators over the prudent.
Converting homeowners to renters. This is something Dean Baker suggested, and is kind of a Single Family Public Housing program. This would avoid the flood of foreclosures, and the banks could sell the homes over several years.
None of these programs is especially attractive, so I expect more delays and “can kicking” that will keep foreclosures elevated for years. I’ve felt all along that HAMP was just a delaying tactic. By restricting supply, the program has pushed up house prices a little and that has helped the banks raise capital. Now that the capital raises are over, maybe it is time to just accept the consequences – and let house prices fall to market clearing levels.
-excerpt from “HAMP Seen Hurting Housing” from Calculated Risk.