Is Federal Intervention Creating More Foreclosures?

For a number of years, federal interventions have affected the housing market’s recovery from its collapse of a few years ago. By buying up mortgage-backed securities and selling off lots of foreclosed homes, the government has aimed to stimulate growth and bail out struggling homeowners. But recent decisions by Edward deMarco of the Federal Housing Finance Agency (FHFA) have critics calling for his firing and raising fears that more foreclosures might drag the recovery to a halt.

The relationship between federal mortgage assistance, foreclosure issues and the housing recovery has been the subject of many efforts to analyze what went wrong in the US housing market a few years ago and how to fix it now. The Fed’s interventions have kept mortgage rates low, put foreclosed homes on the market and offered ways to bail out homeowners in danger of defaulting on loans. But, according to a recent article posted on The Ticker, critics claim policies put in place by deMarco may destabilize the recovery and create another round of foreclosures.

As we’ve discussed in previous posts to this space, foreclosures are the millstone around the metaphorical neck of a housing recovery begun a few years ago after the 2008 collapse. Too many untended foreclosures blight neighborhoods, bringing in questionable elements and driving down housing prices. A glut of foreclosures can make home sales difficult, putting more homeowners into crisis and creating a vicious cycle of defaulting loans and foreclosed homes.

One way to reduce the number of foreclosures threatening to flood the markets yet again is to extend efforts to help struggling homeowners. Some of these programs offer refinancing options at lower rates, while others help with short sales and other efforts to avoid the foreclosure process. But, according to housing industry professionals, one essential factor in avoiding another foreclosure meltdown involves principal reduction or outright forgiveness – something the FHFA, led by deMarco, refuses to do.

According to The Ticker, the attorney generals of nine states are calling for deMarco’s  firing on grounds that the FHFA’s policies threaten to undermine the housing recovery. But, some industry watchers point out, those policies reflect a larger picture of dysfunction in the government’s expanding “securitization” of bank loans—loans sold in bundles s investments – a

practice that they say, reduces a bank’s incentives to work with mortgage holders to avoid defaults. DeMarco’s decisions are only one part of the larger problem.

Both sides focus on foreclosures as a major impediment to a strong housing recovery. Keeping more homes out of foreclosure and making sure that foreclosures don’t stand empty for long, are important goals in avoiding another collapse like the one in 2008. Independent investors following Jason Hartman’s investing guidelines can expect those policies set by DeMarco and the FHFA, as well as the government as a whole, to affect the housing industry landscape for years to come.

The American Monetary Association Team

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