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Foreclosure Mitigation Efforts in the United States: Approaches and Challenges

Vladimir Klyuev and John Kiff

No 2009/002, IMF Staff Position Notes from International Monetary Fund

Abstract: Home foreclosure rates have risen in the United States to the highest levels since the Great Depression. With house prices falling, lending standards tightening, unemployment rising, and interest rate resets in the pipeline, foreclosures are projected to go even higher. While most of the time a foreclosure is a suboptimal resolution of a distressed mortgage, a number of features of the mortgage finance system often prevent loan modifications. This paper reviews the impediments to successful mortgage restructuring and proposes a number of ways to improve the situation. The proposals build on the recognition that the key problem is a combination of negative housing equity and unaffordable debt service, and a successful loan modification scheme should address both issues. Given the key role foreclosures play in the adverse housing market dynamics, and several market failures that the paper identifies, the burden of mortgage debt restructuring should be shared by the taxpayer.

Keywords: SPN; loan modification; mitigation effort; borrower default; mortgage borrower; loan liquidation; modification procedure; subprime mortgage; ARM loan origination; home equity; modification scheme; delinquent loan; mortgage industry; servicer IndyMac; loan term; modification program; modification offer; Mortgages; Loans; Housing prices; Collateral; Housing (search for similar items in EconPapers)
Pages: 41
Date: 2009-01-27
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Citations: View citations in EconPapers (2)

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