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Friday, March 1, 2013

Preserving Homeownership: Foreclosure Prevention Initiatives

Katie Jones
Analyst in Housing Policy

The foreclosure rate in the United States began to rise rapidly beginning around the middle of 2006 and has remained elevated ever since. Losing a home to foreclosure can hurt homeowners in many ways; for example, homeowners who have been through a foreclosure may have difficulty finding a new place to live or obtaining a loan in the future. Furthermore, concentrated foreclosures can drag down nearby home prices, and large numbers of abandoned properties can negatively affect communities. Finally, the increase in foreclosures may destabilize the housing market, which could in turn negatively impact the economy as a whole.

There is a broad consensus that there are many negative consequences associated with rising foreclosure rates. Since the foreclosure rate began to rise, Congress and both the Bush and Obama Administrations have initiated efforts aimed at preventing further increases in foreclosures and helping more families preserve homeownership. These efforts currently include the Making Home Affordable program, which includes both the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP); the Hardest Hit Fund; the Federal Housing Administration (FHA) Short Refinance Program; and the National Foreclosure Mitigation Counseling Program (NFMCP), which provides funding for counseling for homeowners facing foreclosure and is administered by NeighborWorks America. Two other initiatives, Hope for Homeowners and the Emergency Homeowners Loan Program (EHLP), expired at the end of FY2011.

While there is a broad consensus that there are many negative consequences related to foreclosures, there is less consensus over whether the federal government should have a role in preventing foreclosures and, if so, what that role should be. Furthermore, many existing federal foreclosure prevention initiatives have been criticized as being ineffective. This has led some policymakers to suggest that changes should be made to these initiatives to try to make them more effective, while other policymakers have argued that some of these initiatives should be eliminated entirely. In the 112
th Congress, the House of Representatives passed a series of bills that, if enacted, would have terminated several foreclosure prevention initiatives. However, these bills were not considered by the Senate.

While many observers agree that slowing the pace of foreclosures is an important policy goal, there are several challenges associated with designing foreclosure prevention initiatives. These challenges include implementation issues, such as deciding who has the authority to make mortgage modifications, developing the capacity to complete widespread modifications, and assessing the possibility that homeowners with modified loans will default again in the future. Other challenges are related to the perception of unfairness in providing help to one set of homeowners over others, the problem of inadvertently providing incentives for borrowers to default, and the possibility of setting an unwanted precedent for future mortgage lending.

This report describes the consequences of foreclosure on homeowners, outlines foreclosure prevention initiatives implemented by the federal government in recent years, and discusses some of the challenges associated with foreclosure prevention.

Date of Report: January 11, 2013
Number of Pages: 56
Order Number: R40210
Price: $29.95

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