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Wednesday, October 17, 2018

10 Questions — And Answers — To Help You Understand The Foreclosure Crisis

by Blair Hickman, ProPublica


Last week, ProPublica reporter Paul Kiel took time out from promoting his e-book to answer reader questions on Reddit about the foreclosure crisis, buying a home and how he got started as an investigative journalist. We rounded up some of the best, trying to represent a full view of the chat (and the crisis.)

What caused the foreclosure crisis and what can be done to fix this problem? — erkapathy

Big questions! Causes: well, two big causes. The crisis started with subprime loans, or loans made to risky borrowers, like the one I write about in my new e-book. Starting in 2007, housing prices turn downward. That meant people with loans they couldn’t afford couldn’t sell to get out of it any more.

And there were lots of really crappy loans out there, loans that really were never affordable for people to start with. Those loans got made because …unscrupulous mortgage brokers were pushing them, and yes, because borrowers were willing to take them on. Fraud was really common 2014 brokers just making up income numbers. Some of the loans didn’t even require proof of income or assets.

So the first big cause was bad, mostly subprime lending.

The second big cause was that the economy tanked, and there was a spike in unemployment. Mortgage servicers handling these loans made matters worse. They had a financial incentive to just push people toward foreclosure, to be understaffed, etc.

For years, the government mainly took a carrot approach. They tried to provide subsidies to convince banks to competently handle modifications and foreclosures. It didn’t work. So now there’s more of a stick approach. If there are real consequences, it might work, but it’s sure taken a long time for the approach to change.

I should mention that I discuss one big policy alternative in the piece: allowing bankruptcy judges to modify loans. Obama had supported that when campaigning, but essentially ditched the issue once he was in office.

I’ve been surprised at the public’s relative lack of anger…everything just seems to roll along like it always has. Do you see some sort of breaking point? — AndyRooney

Even at the height of the crisis, this was a problem affecting a relatively small minority of the population. Six or seven million delinquencies sounds like a lot, and it’s historically high, but you have to keep in mind that’s out of about 50-55 million total mortgages. So I think there’s always been some wariness among policymakers about seeming to favor that minority. But the robo-signing scandal did at least prompt some change as far as that goes.

I keep hearing that “banks don’t want to be in the housing business.” But if not, why didn’t they try harder to work with people on their mortgages? I know two different homeowners who couldn’t get their lenders to even return their calls when they began to have trouble paying their mortgages. Is this a simple transfer of assets from the poorer to the richer? Why did the crisis play out this way, if the banks aren’t truly better off because of it? — krrush5

Keep in mind that roughly 90 percent of the time, the bank handling your mortgage payments doesn’t actually own your loan. They’re just acting as the mortgage servicer 2014 their job is to process your payments and then deal with you if you fall behind. A lot of what’s happened over the past few years flows from that simple fact.

Basically, during the housing boom, the banks saw servicing as an easy way to make some good money. The model, essentially, was: let’s take on as many loans as we can while dealing with those customers as little as possible. It worked great as long as the boom continued. But when housing prices started dropping and millions of people started calling their servicer, it proved a recipe for disaster.

The [foreclosure] problem seems so large, so intractable 2014 do you see an end in sight? And How long do you estimate it will take for the market to recover? For all these underwater homes to be dealt with? — AndyRooney

I think it’s too soon to say that the end is in sight, but the homeowner facing foreclosure now at least has a bit better of a shot than someone facing foreclosure two or three years ago.

Oddly enough, some of that is due to the robo-signing scandal. That finally prompted regulators and law enforcement to take some sort of meaningful action. Regulators swear up and down that this time if the banks break the rules, there will be consequences. We’ll see about that, but at least it’s movement in the right direction.

And it depends on what you think “recovering” means. A number of analysts think house prices will bottom this year. But it will likely take until 2014 or so before the number of homes facing foreclosure descends to something like normal levels.