The Foreclosure Crisis is the direct effect of the mortgage crisis that became apparent in 2007, so in order to solve the current crisis we must tackle the cause, not just the symptoms. The issue at the heart of the mortgage crisis is that in most cases the cost of the mortgage has risen above the market value of the home, trapping the homeowner. To solve the crisis both in the short-term and to prevent similar crises in the long-term, steps must be taken to achieve two broad goals: make mortgages affordable by regulating mortgages and mortgage providers and lowering interest rates, and stabilize the market value of homes by increasing demand and decreasing supply.
In the past, governmental regulations on banks and mortgage lenders would have seemed out of place, but now that the government has had to step in and bail out banks, the government is justified in increasing regulations. In the last twenty years lender’s actions have become riskier and greedier. They take advantage of consumers’ trust in future prosperity and exploit debtors.
• The first regulation necessary to protect lenders and their clients is to set regulations on adjustable rate mortgages. The interest rate on a mortgage should not be allowed to exceed a specified percent above inflation. This protects both the lender (by adjusting with inflation) and debtors (by placing a cap on interest rates). In this way, mortgages will become affordable.
• A second limit should be placed on interest rate increases as penalties due to late payments on all loans. Such increases target those who are already struggling to pay and are therefore most at risk to default. This limit should be placed on all loans because interest rates that are unjustly high lead to immense debt and often foreclosure. Creditors must be allowed to increase rates as an incentive against failing to make payments, but a cap should exist at a reasonable point. These actions will protect debtors from unjust rates and will ultimately protect creditors from defaults on their loans.
• The next essential regulatory act is to limit the size of mortgages. A regulation should be put in place that prohibits the granting of a mortgage that is over 100% of the market value of house. In the past, when house prices were rising it seemed safe to take out a mortgage higher than the value of a house, but that is a root cause of all mortgage crises. The economy naturally grows and shrinks and so does the market value of a house. When mortgages represent more than the market value of the collateral and the value of the house drops, homeowners cannot sell their house for the equivalent of the principal and if the homeowner cannot make payments, foreclosure or bankruptcy are the only options. This clearly limits the lenders, but it is a necessary regulation to protect lenders from losing money. In the case of a foreclosure in which the mortgage is worth more than the collateral, the lender suffers the difference and risks its...