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The Unintended Consequences of the Mortgage Settlement

by Houston Agent

Mass foreclosure filings could be the unintended consequence of the just-announced mortgage settlement.

The recently-announced mortgage settlement is being heralded by state attorneys general and government officials for its $26 billion deal to help hundreds of thousands of troubled homeowners, but as a recent CNNMoney article reveals, there may be unintended consequences to the settlement, specifically in the form of foreclosures.

According to the article, because of the complicated negotiations between representatives from the five largest banks and 49 state attorneys general, lenders delayed foreclosure proceedings, leaving a backlog of distressed properties that, most likely, will be unaffected by the provisions of the settlement.

Rick Sharga, executive vice president for Carrington Holdings, a real estate finance firm, said in the article that many of those distressed properties will now enter into foreclosure proceeding in 2012.

“The bottom line is that 2012 will see a lot of foreclosures that should have taken place in 2011 and didn’t,” Sharga said in the article.

According to RealtyTrac, foreclosures declined by 34 percent in 2011, but, as Daren Blomquist, the vice president of the data company, said, much of that decrease was because of lender uncertainty in the face of the mortgage settlement.

“We think what we saw in 2011 was artificially low foreclosure numbers,” Blomquist said.

He added that foreclosure filings in 2012 could increase anywhere from 300 to 600 thousand this year.

Both Sharga and Blomquist see positives in the settlement, which could reduce mortgage payments for up to one million mortgage holders. The problem, though, comes in the form of homeowners who cannot afford to make a new, lower mortgage payment because of elongated unemployment and other economic hardships.

“The settlement really wasn’t designed to prevent foreclosure on loans that aren’t salvageable,” Sharga said in the article.

CNNMoney’s article ultimately ends on a positive note, but in an ironic fashion. Though foreclosures will rise, and many homeowners will be forced from their homes, the article concludes that such a process will ultimately be a good thing for housing. Not only will the distressed properties, and their ill effects on the housing market, be purged from the economy, but the uncertainty they create in agents and lenders will also be gone, and prices and inventories can finally recovery.

Do you agree with that sentiment, though? Would we not be better off with a principal write down program, or a mass refinancing program, similar to what President Obama recently announced?

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