Mortgage Rescues Fail as Home Price Drops

2009 February 13

February 13 2009 - The Obama Administration wants banks to offer loans with easier terms to more than 2 million borrowers in danger of defaulting on their mortgages, twice as many as 2008. That won’t stem the foreclosure crisis if prices keep falling.

A third of owners will walk away when the value of their homes drops 20 percent or more below what they owe, even if they can afford the payments, a situation known as “rational default,” said Norm Miller, director of real estate programs at the University of San Diego School of Business Administration.

Obama has committed at least $50 billion in guarantees for lenders that negotiate new mortgage terms, and proposes putting taxpayer funds at risk for half of $444 billion of loans that would be modified this year. Fifty-eight percent of the modifications made during the first quarter of 2008 ended up back in default, according to the U.S. Treasury’s Office of the Comptroller of the Currency. Unless lenders cut principal owed to reflect the current market value of properties, the same thing may happen this year, Miller said.

“The biggest reason modifications end up re-defaulting is because they are in markets where prices have continued to go down,” Miller said in an interview. “When people are underwater and don’t see an end to it, a lot of them just walk away, even if they can make their payments, because they don’t want to be wiped out financially.”

Home Prices Down

Home prices are down 19 percent nationwide since 2006, according to Denver-based research firm Integrated Asset Services LLC. Prices have dropped by 51 percent in parts of California, the most in the U.S., and by 45 percent in some areas of Florida. Those states also lead the nation in new foreclosures, according to RealtyTrac Inc. in Irvine, California.

Mortgage Rescues Fail as Price Drops Spur Increase in Defaults

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