The Solution To Foreclosures Lies In Finding The Causes

June 3rd, 2008

Hit and run tactics to tackle the menace will not pay. The solution to foreclosures, as in any other problem, lies in finding the causes.

The first rather naïve answer is that the sub-prime ARM category of mortgages are responsible for it. These may have had their role to play but the cause cannot be that simple and straightforward. The main cause is the change in real estate prices – the tumbling in the real estate market.

An article in the Boston Globe categorically states that the increase in foreclosures in the Massachusetts region is because of the lowering of foreclosure houses market and not by increase in mortgage rates. The comments have been based on researches related to the Federal Reserve Bank of Boston. Unaffordable mortgage loans are not directly responsible for foreclosures. For instance during 2001 when there was an economic slump foreclosures were not common. This was because people could wiggle out of the mess by selling their houses and repaying loans. The price of the house was sufficient to cover the debts and even left something over to start a new life. Today the worth of the house has become less than the loan amount. The house was worth keeping in the early years of this century. So people worked and tried hard to keep mortgage commitments. But today it is not worth the trouble. Thus it is seen that the movement of house prices have a dominant say in increasing foreclosure numbers.

Against this background it appears that the efforts of local and federal authorities to take the foreclosure bull by the horns are not going to bear fruit or be effective. Henry Paulson. US Treasury Secretary talks of freezing monthly payments but the plan is doomed from the start. It does not address the problem by hitting the nail on the head – the primary cause. Foreclosures are pushed forward by dropping equity of houses.

Freezing some mortgage payments will have little effect on the bulk of the borrowers says an analyst from Barclays Plc and UBS AG Bond. Few will be qualified for the condititons attached and considering the time factor between talk and action, many more will enter the foreclosure zone. Only 12% of the sub-prime ARM will able to shift to fixed rate long-term loans. The borrowers has to be an occupant of the house and current in his payments to qualify for this.