Why Foreclosure Prevention Is a National Priority
Even during the worst housing crisis in decades, the overwhelming majority of U.S. borrowers with first mortgages continue to make their payments on time. So why has there been so much time and money spent on stemming the foreclosure crisis? It's because the impact and costs of foreclosures are so significant and far-reaching – affecting not only those borrowers who have fallen behind on their mortgage, but entire communities and the broader economy as well.
Approximately three million borrowers have lost their homes to foreclosure since the start of the recession, and at least five million more are at risk of losing their homes. Given numbers like these, helping as many struggling borrowers as we can to avoid foreclosure must remain a national priority.
The best outcome for all parties is to keep struggling borrowers in their homes. At Freddie Mac, we explore every avenue to help borrowers stay in their homes. The Administration's Home Affordable Modification Program (HAMP) is a growing and important part of our efforts, as are our long-standing, workout solutions that include loan modifications and repayment plans. We continue to work with the industry and our government partners to find long-term solutions to help homeowners.
However, sometimes it's just not financially feasible for the borrower to remain in the home. This is more likely to happen with borrowers who are struggling from job loss, curtailment of income, a health event or who bought more house than they could afford. In these cases, the best scenario for all parties is to help the borrower find a graceful exit from homeownership. Foreclosure alternatives like short sales and deeds-in-lieu help borrowers to avoid the stigma of foreclosure, shorten the waiting period before they can buy a new home, and may inflict less damage on their credit reports. Short sales are a growing part of our foreclosure avoidance toolkit at Freddie Mac - growing more than 600 percent over the last two years.
Foreclosure alternatives are also beneficial to lenders and insurers, as they can help minimize credit losses. Foreclosures translate into significant losses for lenders and investors. While losses can vary widely, several independent studies find them to be over $50,000 per foreclosed home or as much as 30 to 60 percent of the outstanding loan balance.
While the greatest impact of foreclosures is obviously felt by those families who lose their homes, the fact is that the impact on communities is also substantial. First, foreclosures put downward pressure on house prices – especially in areas where there are high concentrations of foreclosed properties. For example, one in every 31 households in Nevada and one in every 45 households in Arizona received a foreclosure notice in the first quarter of 2010, whereas the rate for the U.S as a whole was one in every 80 households. While nationally, home prices declined less than one percent from March 2009 to March 2010, house prices decreased by more than 7 percent in Arizona and by nearly 12 percent in Nevada during the same timeframe. So you can see that high concentrations of foreclosures have helped exacerbate price declines in severely hit markets. Second, in addition to the effect on home prices, the loss of real estate tax revenue from lower property values harms public services and education.
It's important to note that while short sales add to housing supply and thus also put downward pressure on home values, they tend not to suffer from lack of maintenance or damage to the extent that foreclosed or abandoned properties do. As a result, the negative impact on neighborhood home values is mitigated when short sales help avert foreclosures.
The decline in home values driven by foreclosures also has a large impact on the broader economy. When house prices decline, personal wealth and spending power are greatly diminished. This is especially detrimental here in the United States where consumer spending accounts for nearly two-thirds of our GDP. Compounding this is the loss of construction spending and its multiplier effect on the economy.
For these reasons and more, foreclosure prevention is one of Freddie Mac's top priorities at this critical time. We believe it's the right thing to do for families, and the right thing for our company to do as a responsible steward of taxpayer support. Since the housing crisis began, our efforts have helped more than 350,000 families facing financial hardship to avoid foreclosure. A few of our recent efforts include implementing document collection and signature services in order to complete more HAMP loan modifications and introducing the Borrower Help Network and Borrower Help Centers to provide free financial counseling for distressed borrowers.
These efforts to make the HAMP program a success are on top of Freddie Mac's own long-standing foreclosure prevention programs. Freddie Mac has long been recognized as an industry leader in identifying and addressing delinquencies before they become foreclosures. In addition to helping borrowers with our loss mitigation tools, for years we have worked closely with national nonprofits to educate borrowers about foreclosure prevention and mortgage fraud. Supporting these efforts are a number of online resources, including an award-winning financial literacy curriculum.
The undisputable fact is that everybody wins when foreclosures are prevented. Keeping families in their homes or allowing them to exit gracefully is good for borrowers and lenders, good for neighborhoods and communities and is critical to the recovery of housing and the nation's economy. That's why Freddie Mac will continue to do all that we can to keep the housing industry focused on this critically important goal.
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