Thursday, August 19, 2010

The Current Housing Markets Favorite Dance.

Ever heard of the Limbo? Today many homeowners are trapped in limbo, living in homes but not paying for them, waiting to see if someone will help or throw them out. Sure some are victims of their economic circumstances, yet others are opportunists, choosing not to spend on a house worth less than they owe. Instead the live rent free until their lender makes a move.

This is a radical departure from previous crashes in real estate. Before there were far fewer troubled loans and banks moved speedily on those who fell behind on their payments. Now most lenders simply can't keep up and still others appear reluctant to flood a weakened market with foreclosed homes. This all adds up to instability for the housing market as lenders slowly work through the backlog while homeowners endure uncertainty that could last years. It's bad all the way around, from the neighbor to the nation.

Nationwide, roughly 3.5 million home loans are in limbo. It will take years to eventually take these homes through the process as the inventory continues to increase. This leaves many people anxious because they know they're behind yet know all these foreclosures are happening and they know they could be next.

Part of the reason homeowners wind up staying in their homes so long lies with the lending industry. Many banks are overloaded with people who are behind in payments, and financial institutions are hesitant to process thousands of foreclosures at once because dumping all those properties on the market would lower prices even more. Many lenders are moving slowly because they hope the government will eventually step up to help cover their losses. They also may be hoping an economic recovery will allow many borrowers to catch up with their payments.

Some argue the housing market would be better served if foreclosures moved quickly and that any resulting drop in home prices is necessary to adjust housing values. Allowing homeowners who don't pay to remain in their homes means many will stop maintaining their properties, which hurts their neighborhoods, and their delinquency may even encourage neighbors to default, extending the housing market's pain.

New state laws have built more time into the foreclosure process, adding a requirement that lenders try to contact borrowers in person before they are allowed to file a notice of default, for example. Between legislated timelines, delays because lenders are swamped with loan modification cases, and possible strategic delays on the part of banks, many homeowners can stay put, payment-free, for months on end.

There's another unfamiliar wrinkle in delinquency trend. In the past as unemployment rises, mortgage delinquency does too, just as it has in the past few years. But this time around even people who are employed are debating whether to keep paying the mortgage because they're so far underwater.

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