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If you think solving our foreclosure crisis in this country is by conducting State or Federally mandated moratoriums…well, you are completely misguided.

Try looking at the moratorium issue as strictly a monetary policy vs. a politically correct policy.

We all know foreclosure cost money and, it isn’t cheap. We also know the longer a home stays in foreclosure or the longer a bank has to hold onto bad debt, the more expense the bank takes on in Attorney fees, public notice cost, city and state filing fees, property maintenance fees and so on. The more cost the bank takes on, the greater the bank’s loss, and that leads to the bank’s requiring higher credit scores to get a loan, higher interest rates, higher down payments and so on. My point is, all that loss is passed onto the consumer through other ancillary fees which makes the general cost of banking more expensive. In other words, the rest of us will end up paying for these moratoriums in the long run so, why make that cost any more expensive than it already is?

Now in some cases, like the federal government using moratoriums, some people argue it is necessary to do everything we can to delay or trickle in the foreclosures because there are just so many that if they all came in at once, it would crash the economy in a way we haven’t seen since the Great Depression. I am no “REO Oracle” as one member once sarcastically but humorously joked (at least I think he was joking…I hope he was joking….maybe he wasn’t joking…either way, it was funny) but, I do believe that trickling in the inevitable does nothing more than create a long drawn out crash over many years. What would you prefer…a 10 year recession / bear market or a 3 year depression? I know what I would prefer and, I am not sharing because the hate mail would come in droves….lol, it really would.

So, why do I keep saying, “the inevitable”. Well, the truth of the matter is that from my own experience with Foreclosure Avoidance Counseling, Loan Modifications, Short Sales and REO’s, I can tell you that these banks are still doing HIGH RISK LOANS. That’s right, you heard me correctly….HIGH RISK loans are still being used widely by many Loss Mitigation Departments that are doing loan modifications and other workouts to help preserve homeownership. The reason they are still using these HIGH RISK loans is because it’s the only way they can bow to the pressure of government to do all they can to preserve homeownership. Once again, the government is stepping in, forcing banks to make risky loans or in this case, loan modifications, that end up foreclosing in 3 months anyways. A recent Fitch Ratings survey acknowledge this fact that I had been seeing in my own business. I don’t have the survey in front of me at the moment and am working from my memory but, I believe that Fitch statistic was somewhere between 60-70 % of those who complete loan mod’s end back in foreclosure in 3 -6 months. Just so you know, in the past 12 months, I have had over 40 individual Foreclosure Avoidance Counseling sessions and out of them, almost half went back into foreclosure in less than 3 months and almost all of them ended up in default in less than 7 months.

Towards the start of this blog, I told you I wasn’t going to share my opinion on moratoriums but, if you haven’t figured it out by now…….well, read this blog a couple and hopefully you will get it. Ok, I will spell it out, moratoriums suck!

All a foreclosure moratorium is, is a political tool to win votes, at least that is my opinion.

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Comment by Sam Shueh on June 18, 2009 at 12:14am
Yea, the REO inventory in south bay is almost non-existent now. The new town homes in Milpitas sold out last year or so already turned into SS slum. ha! After looking at those loan mod paperwork I wonder how long and how many owners can hold on to their homes. My parents taught us to save before we can spend. This generation lives on credit. I can not agree more this is going to linger longer than we care to....
The next interest resets will create more problems. It is merely slowing the decay process.....
Comment by Robin S. Reed on June 17, 2009 at 6:07pm
Once you get past the knee-jerk reaction to hearing the word "moratorium" we must remember their intended purpose. Moratoriums are enacted for the purpose of allowing time to create new policies or procedures that may be effective in preventing the previously postponed activity (foreclosures). As with California's new 90-day moratorium, it is being used to get lenders to work more diligently toward loan modifications. The state is signaling (and not very subtly), that lenders cannot continue to delay or drag out the modification, short-sale process to unbearable lengths and then claim that their only recourse was foreclosure. I believe if everyone takes a broader view you will see that with more modifications and a streamlined short-sale process that we will be able to keep more homes from going to foreclosure. I do agree however, that if new policies and procedures are not implemented, that a moratorium, just to delay the inevitable is a waste of time. And most certainly a moratorium, because "it's summer" is simply ridiculous!
Comment by Steve Adkins on June 17, 2009 at 5:33pm
I agree also, but I also see what could happen if a lot more houses hit the marketplace in a short time period. As explained in "Ask the A/M" dumping houses on the market could start off a chain reaction we do not want. We all must do what ever we can to hold things together as they are now. And then with time the market can absorb the additional properties.

In my area, new construction is the major economic engine. The sooner the builders can get back to work, the faster the local economies will recover. More people working (building houses) the more money spent at local businesses, which will then add more jobs, which will mean more money being spent. Then, when the job market starts improving, we will be able to sell these foreclosed properties quicker and at a better price.

The housing market is improving in my area. Buyers are coming back to take advantage of the low prices, low interest rates and good inventory. Dumping a large number of houses on the market will scare the few buyers away because of the fear of housing values dropping more then they have.

This topic is a double edged sword and there will not be any easy answers. But I say lets do everything we can to avoid hitting rock bottom! A recovery is starting to take off, however small it may be. Lets not kill it yet.
Comment by Michael Howard on June 17, 2009 at 5:27pm
I could not agree more.
Comment by Ellen Dittman on June 17, 2009 at 5:43am
I agree with you, and could not have been better timing. I had a conversation with an attorney yesterday and this very subject came up. They disagreed that the govt had anything to do with loan mod guidelines etc...you gave me fuel for the fire..thanks for the writing!
Comment by edgar on June 16, 2009 at 10:30pm
I completely aggree with you, all they are doing is creating another problem in a couple of years, since none of the loans are having a principal reduction, when you have a loan for 3% for the next years, and then increasing 1% annually for the next 2,in about 7 years that person, still going to be with a house upside down, because in that amount of time, you are not going to recover 200-300,000 that a lot of people, are negative now.
So, we are just holding on the inevitable. which at the end will be the consumer paying more and with more difficult loan qualifications.

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