The U.S. government can stop foreclosure process by implementing two consumer-oriented strategies, according to Jeff Sovern, a consumer law professor at St. John’s University in New York.
One is the reconsideration of the bankruptcy proposal rejected by the Senate in April this year and the other is the creation of the Consumer Financial Products Agency, which has been proposed by the Obama administration.
According to Sovern, these two strategies would prevent the incorrect disclosure procedures that were implemented by lenders during the housing boom. He said that based on a survey he and his assistant Sabihul Alam conducted in July with over 100 brokers in 26 states who were involved in 58,000 home closings, many borrowers during the boom did not understand the final disclosures before they signed the mortgage documents.
Nearly all of the brokers interviewed said that no prospective home buyer ever cancelled their home loans after reading the final disclosures.
The behavior of the borrowers indicated that many of them took out subprime loans even if they could have take out prime loans because they did not understand the final disclosures, according to Sovern.
At the time of loan origination, majority of borrowers also never thought about needing to stop foreclosure process in the near future because they assumed that home prices would never decline.
The disclosures during the boom were also confusing to customers because lenders advertised adjustable-rate mortgage loans as conventional home loans with fixed rates. Borrowers took out ARM loans believing that they could refinance into even lower rates in the future.
They were of course wrong as many of them have already defaulted when their ARM mortgages reset and their lenders refused to refinance or modify their loans because their loan balances have already shot up far higher than the value of their homes.
Sovern believes that lenders need to make up for their failings during the housing boom by reconsidering the proposal to authorize bankruptcy judges to modify the amount of primary home mortgages to reflect the true market value of residential properties.
He argued that if mortgages for vacation homes and commercial properties can be modified, then primary residential mortgages should also get the same treatment under the law.
Additionally, Sovern said that another effective way to stop foreclosure process is the proposed federal agency focused on consumers. He explained that this agency would be able to keep watch over the welfare of American consumers.