As the foreclosure crisis in the United States continues to spiral, increasing attention is being given to novel and creative solutions for reducing the risk of mortgage default. The Obama administration has proposed several government-backed programs to help homeowners stay in their homes, and private lenders have tried various approaches to stabilize the economic situation. To date, none of the enacted efforts has substantially improved the crisis, and as such the number of homeowners filing for bankruptcy and entering foreclosure continues to mount.
The present essay explores both conventional and creative options for reducing the risk of foreclosure. Historical, current, and proposed government and private industry- initiated efforts are discussed in order to highlight the prevalence of the problem as well as the inadequacy of current solutions. The option of renting to avoid default or regain ownership of homesteads which have entered foreclosure, including the Right to Rent Plan (Baker, 2009), is explored as a viable low-risk, high-reward solution for homeowners, lenders, and taxpayers alike.
The Current State of Affairs
According to the Bureau of Labor Statistics (2009), more than 2.3 million homeowners faced foreclosure proceedings in 2008. This was a marked increase of 81% over the previous year. During the same time, unemployment rates skyrocketed. From December 2007 through February, 2009, more than 3.5 million payroll employees lost their jobs (Bureau of Labor Statistics, 2009). Increases in unemployment ultimately lead to increases in credit defaults and foreclosures, as borrowers become unable to financially afford payments. In fact, even though predatory lending practices have been repeatedly blamed, borrower inability to re-pay mortgages has been cited as the number one cause of the foreclosure crisis (Quercia, Ding, & Ratcliffe, 2009). Along with predatory lending practices and borrower insolvency, the real estate market has been flooded with an excess of available properties. This has resulted in an overall decline in property values and an increase in the likelihood of defaults among current homeowners who face having negative equity in their property (Quercia, Ding, & Ratcliffe, 2009).
Consequences of Foreclosure
The effects of foreclosure are far reaching. For individual homeowners, the foreclosure process may lead to loss of self-esteem and emotional distress (Schultz, 2009). Personal credit is also greatly affected by foreclosure. Poor credit may lead to a borrower’s inability to secure adequate credit in the future. At best, borrowers may have limited options for credit including extremely high interest rates. Further, a poor credit rating may be viewed unfavorably by current and potential employers as well as property management companies. Individuals who have poor or high-risk credit may have limited opportunities for employment and could have property rental applications denied (Schultz, 2009).