Several million homeowners, including 2,000 in New Hampshire, are facing foreclosure next year. Their hardship is real, their stories poignant, and election campaigns are under way. So it’s no surprise that cries are being sounded for a government bailout. Last week Sen. Hillary Clinton spoke of creating a $1 billion fund to help those at risk. Congress is being asked to come to the rescue, and several states have created funds to help homeowners refinance at lower rates.
Only a small percentage of the foreclosures are, as economist Brian Gottlob found when he studied a large sampling from New Hampshire, the result of predatory lending practices that regulators and lawmakers are quickly restricting or outlawing. Nor are the traditional reasons for foreclosure, a lost job or medical expenses, a larger than normal factor.
Hard sells by real estate agents eager to make a commission and loan originators who make more money by steering borrowers into riskier, but more profitable mortgages, were a problem. Regulators should pressure those lenders to refinance loans whenever possible. But the vast majority of the foreclosures are occurring because people bought homes they couldn’t afford using sub-prime mortgages that offered low initial teaser rates and little or no money down.
When the initial rate “reset,” payments became unaffordable. Lower the rates and someone who bought a $300,000 home on a $60,000 income still can’t afford it. In some cases, regulators found that the rate could be lowered to zero and the homeowner couldn’t make the payments.
It’s misleading to call someone who has made a year or two of payments on a property a homeowner. Those who bought with no money down, for example, have no equity at all. What they own is a massive obligation to lenders they may not even be able to identify because their mortgages have been securitized and sold in pieces overseas.
Gottlob estimates that for every 10 percent decline in the value of New Hampshire’s homes the foreclosure rate will increase 80 percent. But, since they didn’t make risky loans, no New Hampshire bank is in trouble.
To help those facing foreclosure and homeowners whose mortgage puts them at risk, the New Hampshire Banking Commission staff is holding sessions around the state and meeting one-on-one with people. (For more information visit the commission’s website at www.nh.gov/banking.)
The wave of foreclosures, which increased 10-fold in New Hampshire in the past decade, promises to grow much worse. Fewer people will suffer this time than in the late 1980s, when the last real estate bubble burst and many homes were lost. Plenty of those people, since they had jobs, became renters and started saving to begin anew. That’s what should happen this time.