As policymakers continue to discuss how to react to the current economic disruption, new research aims to highlight lessons from the last major economic crisis. In a series of briefs, Harvard University’s Joint Center for Housing Studies (JCHS) and the Federal Reserve Bank of Boston highlight alleged shortcomings at the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) during the Great Recession and revisits the potential for principal reductions on FHA-insured loans.
The briefs are written from the premise that foreclosures have far-reaching negative impacts, and thus any and all practical steps to avoid foreclosure should be taken.
“The literature on foreclosure is unequivocal: foreclosure is detrimental to households, to neighborhoods, and to the municipalities in which the homes are located,” wrote Rachel Bratt, author of the research briefs published this week.
Bratt studied the policies of HUD and the FHA leading into and during the Great Recession and offered several areas for the agencies to explore moving forward in order to prevent foreclosures and their negative impacts.
She proposes HUD consider the option of principal debt forgiveness, which is currently forbidden at the agency and has been debated in the past for its moral hazard. Bratt said HUD could offer a partial-payment option, in which the department covers a portion of a borrower’s principal.
Acknowledging that the FHA’s Mutual Mortgage Insurance (MMIF) is currently sound, Bratt suggests the agency could do more to help borrowers in need.
“Going forward, the fund must continue to function in a financially sound manner, but HUD also should be willing to draw on the fund to help homeowners remain in their homes,” she wrote.
When borrowers become delinquent, it is common practice for HUD to sell those loans into the private market. Bratt calls on HUD to monitor those private entities to ensure they take appropriate steps in foreclosure prevention.
In some areas, Bratt calls for “more consistent and better enforcement” of existing rules and policies at HUD. For example, “the requirement that the lender offer a face-to-face interview to the mortgageor prior to foreclosure, represents a case of lender/servicer noncompliance and HUD enforcement failure,” she wrote.
The research is particularly timely as the economy faces another recession and “we will likely soon be facing an increase in loan defaults and foreclosures, as significant numbers of people are unable to make their mortgage payments,” according to the research.