The Government Accountability Office or GAO is of the view that current foreclosure outreach program which has been designed to help troubled property owners is not doing enough to reduce foreclosures in United States.
High rate of Foreclosure
Since the rate of foreclosure is still a major hurdle in the economic and housing recovery, a study was conducted by GAO to find ways of enhancing foreclosure mitigation effort. They came out with a report that suggested that government agencies that are a part of foreclosure mitigation program must make changes in their strategies to help existing borrowers.
Significant Negative Equity
The report released by GAO specifically addressed the United States Department of Agriculture, Federal Housing Administration and Government Sponsored Enterprises. Even though these agencies have modified more than 2 million loans, the number of loans that are in foreclosure are still very high which is weakening the American real estate market. An analysis of the mortgage data showed that about 2 to 3 million loans have characteristics that are associated with high probability of foreclosure like significant negative equity and serious delinquency. Significant negative equity means the ratio of loan-to-value of the property mortgaged is 125 percent or more.
These loans that have significant negative equity are concentrated in states like Florida and Nevada. Also, the recent signals like strong home equity and home prices does not mean that real estate market in US has recovered because the prices of some of the properties is still close to their post-bubble lows. Another worrying factor is that total household mortgage debt is $3.7 trillion more than the household’s equity. This means that household wealth is declining and the value of most properties are not rising.
Problems in Loan Modification
Also, thousands of borrowers who had requested assistance did not receive modification. The applications of about 2.75 million borrowers who had requested HAMP loan modification was denied which has decreased the volume of federal loan modifications. Even though efforts have been made to improve the reach of the refinance programs, low participation of the borrowers in these programs has raised questions on the need for the Treasury to offer financial support for these programs. GAO is of the view that funding given to underused programs must be re-evaluated.
Even though several agencies have stepped up their efforts to monitor the outreach of the services to struggling borrowers, most agencies are not conducting analysis to evaluate the benefits and effectiveness of the foreclosure mitigation programs. GAO is of the view that better analysis of the data collected is needed to improve the effectiveness of mortgage mitigation effort. These efforts will not only reduce cost but also improve the effectiveness of the outreach program.
Suggestions of GAO
The report has also suggested that principal taken by a few homeowners must be forgiven especially loans that have significant negative equity. However, this must be used as one time measure as some borrowers may misuse this benefit.
GAO has also come out with suggestions to help agencies and enterprises that are a part of the outreach program. The report has also called for detailed analysis of the borrower profile and loan data which can help them find effective solutions.