Can we fix the homeowner default trap?

An excessive rate of home foreclosures has bad consequences all the way down the line — the homeowner eventually has to move out, property taxes don’t get paid, so the town or city starts going broke, the banks have excess inventory of homes that can’t be sold, which drives prices down even further. Buildings go vacant, squatters move in, and so on.

The federal loan modification program that was started last year hasn’t proven effective, as most homeowners who have tried the program have left without getting any practical benefits.

Tufts University professor Rachel G. Bratt has another idea. She proposes modifying another existing plan, the Neighborhood Stabilization Program, instead. Professor Bratt would revise that program to allow under water home owners to transfer title to their property to a non-profit organization. They would then be allowed keep a roff over their heads by paying a fair monthly rent that they could actually afford. They would also get buy-back options, so they could resume ownership within five years if the economy improves. If the family moved out instead, the non-profit would ensure that the building would remain among the local stock of affordable housing.

Chapter 13 bankruptcy filings also offer homeowners the ability to stay where they are, but there are requirements with that, too. Chapter 13 filers must generally have enough income to catch up on missed mortgage payments over a five year period; this is a god send to some homeowners, but not much help to others, for example if a husband and wife are both unemployed.

Fixing the Neigborhood Stabilization Program is a great idea, but the fixes are not available to homeowners who are stuck right now; Chapter 13 is available now, but homeowners may want to consult with a bankruptcy attorney to discuss whether they make good candidates for this particular relief option.

 

By Doug Beaton

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