HUD analyses the Prime Reasons for the Foreclosure Mayhem

HUD recently submitted an analysis of the prime reasons for the foreclosure mayhem – as ordered by the Housing and Economic Recovery Act of 2008. It also gave remedial suggestions that could to taken to tide over the crisis and also to prevent future similar repeats.

The report stated that it was the sub-prime loans that initially started off the astronomical numbers of foreclosures. These risky loans were the main culprits. The Alt-A loans are another set of potential trouble and of late the numbers of defaults and delinquencies have lately started to increase.

In both categories foreclosures have shot up rapidly. As the economy worsened from 2008 to 2009 the number of foreclosures among the prime mortgages also began to increase – “further exacerbating the crisis.”

The theory is that the falling value of the houses is prime driving force behind the defaults. HUD opined that majority of the borrowers became delinquent because their financial position changed for the worse because of the condition of the general economy. These have been termed as “trigger events” – loss of job, health troubles, family problems like death or divorce etc.

Consequently foreclosures are being pushed forward by a process having two states. The first stage decreases the financial liquidity of the borrower leading to the second stage that prevents either refinancing or reselling.

HUD argues that the steep and sudden hike in mortgage delinquencies and subsequent foreclosures is because of the phenomenal increase in the number of loans inviting high risks. The mortgage industry seems to have encouraged people to take these loans because of the high profits the industry could rake in.

These were packaged, sliced and then sold to investors across the globe. Many of the borrowers did not understand the actual cost and risks behind these loans. No effort was made to make them understand. Advantage was taken of their ignorance.

HUD admitted that deliberate fraud on the part of the brokers as well as the borrowers could have precipitated the crisis. According to BasePoint Analytics that focuses on fraud detection, has calculated that 9% of the delinquencies are connections with some type of fraud.

Another contributing factor, according to HUD, is the Community Reinvestment Act that was passed in 1997. The idea was to encourage banks to address the credit requirements of the communities where they have branches. This spurred on a wave of dangerous lending with the banks anxious to meet the requirements of CRA.

Original Post: HUD analyses the Prime Reasons for the Foreclosure Mayhem