Get ready for a perfect storm — a Category 5 foreclosure tsunami. The first wave was launched on February 17 when FannieMae announced an extension of the temporary halt to foreclosure sales (Lender Letter) to March 6, 2009. The second wave came on February 18 as President Obama announced the Homeowner Affordability and Stability Plan (HASP). This Plan included the start of the third wave of this storm — the announcement that Guidelines will be released on March 4, 2009. When these three events collide on or around March 4 – 6, hundreds of thousands of homeowners, investors and tenants are going to wake up to find themselves adrift in a stormy sea of chaos with no life preserver.
Unless the Federal government comes up with a miracle when it releases the much-anticipated Guidelines on March 4, we can anticipate a sharp increase in the number of foreclosures that will be filed and/or processed. Moreover, the sheer number of foreclosure actions currently pending in the nations’ State courts will have to be processed off the books. The same day as President Obama announced his plans for mortgage relief, the WSJ carried an article about a Judge in Lee County, Florida, running a “rocket docket” to clear the backlog of pending foreclosure actions. He only had two questions for the homeowners: Are you current? Do you still live there? For those who answered “No” to the first and “Yes” to the second, he gave them 60 days to work out a deal or move out. President Obama, in his Feb 18 speech, pretty much left only one option for those who were not current on their payments — Bankruptcy court. Although lenders generally would like to avoid this option, borrowers have little hope that the results will be any more favorable. There is very little sympathy for the borrowers in these situations, and therefore very little political will to launch a rescue effort.
Adding to the chaos of this bleak forecast is the fact that hundreds of thousands of borrowers are being swindled by loan modification scams promising to “stop foreclosure now” and “save your home.” Although these so-called “loan mod experts” have been around for years, their business took off in the past couple of years as the Federal government put pressure on lenders to voluntarily work out new terms in order to keep people in their homes. Unfortunately, approximately 60% of the loan modifications that were worked out have gone back into foreclosure. The blame seems to fall evenly between the lenders’ meager concessions and the economy’s continuing decline. It doesn’t matter what new terms you agreed to in January if you got laid off in February!
Unless the HASP Guidelines includes a miracle and not just a placebo of unrealistic conditions, and unless Fannie Mae and the lenders extend the moratorium on foreclosures, we can expect foreclosure hell to break loose in early March. Sadly, the impact will be devastating on families, neighborhoods and communities across the country that are already suffering from the blight of foreclosures. The Obama Administration must recognize that this situation is akin to a Category 5 economic storm that will rage across the entire country, and must respond accordingly. Failure to do so will make the Bush Administration’s response to Katrina seem benign in comparison.