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Housing Market: Foreclosure Relief Programs Under Fire

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Data continue to show that loan modification and short sale initiatives are floundering, and foreclosure relief programs are now on the chopping block.

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It wasn't so long ago that foreclosure relief programs had near-unanimous support in the political community. There were elections afoot after all, and something had to be done about the millions of homeowners facing the loss of their home.

But as data continue to show that loan modification and short sale initiatives are floundering and austerity emerges as the buzz word for the upcoming 2012 elections, such programs are on the chopping block. The House of Representatives passed two bills last week that evidence the lack of support for foreclosure prevention programs that have failed to stabilize the tattered housing market.

Last Thursday, the House voted to end the Federal Housing Administration's short refinance program, which aimed to help borrowers refinance their underwater mortgages, and on Friday passed a bill killing a Housing and Urban Development program that provides interest-free loans to homeowners who have lost their jobs. But as HousingWire reports, any push to terminate the programs may not make it to the finish line. A source within the Senate called the bills "dead on arrival" and the Obama administration said the president would veto the bills if they make it to his desk.

Meanwhile, House Republicans and even some House Democrats are working on similar bills to kill the Home Owner Modification Program, or HAMP, and Home Affordable Foreclosure Alternative, or HAFA, which push banks to modify delinquent mortgages and accept short payoffs, respectively. A short payoff (also known as a short sale) is when a bank allows to the homeowner to sell the home for a lower value than the mortgage. Both programs were Obama-led initiatives that promised relief for troubled borrowers. Actual results have been underwhelming, at best.

The specter of ending borrower assistance programs is a mixed bag for big banks like Wells Fargo (WFC), JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC), who still retain billions in exposure to delinquent mortgages. On the one hand, less federal pressure to accept short sales and complete loan modifications could mean that banks take fewer losses in the near term.

On the other hand, homeowners eligible for assistance would are almost certainly end up in foreclosure if the programs get nixed. Foreclosure remains the least "profitable" exit scenario for banks, as carrying costs, home price depreciation and liquidation expenses make taking a loan through the entire repossession process a costly endeavor. A higher foreclosure rate means that banks would likely increased losses from a larger portion of their delinquent loans ending up real estate owner, or REO.

Certain real estate investors however, would cheer this possibility, as recent foreclosure moratoria stemming from last year's robo-signing scandal has left foreclosure buyers starved for projects.

In the long run, winding down ineffective foreclosure prevention programs is the healthiest option for the housing market and the nation's homeowners at large. The longer millions of distressed mortgages loom on the horizon, the longer a true recovery in the housing market will be forestalled. Without federal pressure, banks are more likely to make modification and short sale decisions based on economics, rather than politics.

Despite being now five years into the housing downturn and with prices nationwide down by more than 30%, buyers remain wary due to the vast uncertainty about how the logjam of potential foreclosures will play out. And until the we clear the overhanging supply that will be seeping out into the market, real estate will continue to be a drag on the economy.
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