Short Sale and Foreclosure – HUD Speaks Out

In an attempt to institute actions to mitigate the present nationwide tidal wave of residential foreclosures and measures to prevent the recurrence of the phenomenon the US Department of Housing and Urban Development (HUD) has released a report to congress outlining these recommendations.

According to the HUD report one of the biggest contributors to the initial foreclosure crises was the uncontrolled issue of risky subprime loans. These loans made up an unacceptable percentage of national loan percentages and a large section of national foreclosure activity has taken place among this loan group.

A stead rise in the foreclosure rate amongst the prime, fixed rate loan group due to the deteriorating economy in 2008 and 2009 just exacerbated the crises. The situation was further accelerated by the 1997 Community Reinvestment Act (CRA) which encouraged banks to meet community’s credit needs. This put pressure on banks to meet CRA quotas and no doubt encouraged the practice of risky lending.

HUD suggests in its report that awareness among consumers of credit regarding appropriate mortgage choices had to be addressed as a matter of urgency. Services such as counseling for consumers needed to be increased along with measures to curb the overt, aggressive marketing techniques commonly used by banks.

The report also suggested that efforts be made to outlaw deceptive or misleading loan features often used as marketing gambits by lenders. The report goes on to suggest that practices such as institution of yield spread premium incentives be examined as these tend to encourage the sale of unrealistically  priced loans to consumers.

One of the cornerstones of the HUD report is the focus placed on the need for radical improvements to the general regulatory structure that serves as watchdog to the mortgage financing process. The HUD report suggests that a far greater degree of uniformity is needed in the legislation which governs lending practices across all sectors of the mortgage industry.

The HUD report is an encouraging piece of literature as it reflects a shift in focus at national legislative level to a more sustainable and corrective form of intervention in the beleaguered mortgage market. This bodes well for the long term recovery of the market and would be a critical part of any meaningful measures instituted to prevent a repeat of the phenomenon.