Dealing with Delinquent Mortgages

The recession has caused a number of homeowners to fall behind on their mortgage payments. However, mortgage lenders have significantly changed their strategy when dealing with delinquent mortgage payments. Rather than enforcing a "pay or pack" doctrine, many lenders have attempted to adjust payments or find other means to allow borrowers to keep their homes. In his article in the New York Times, David Leonhardt reports that mortgage lenders have introduced an approach to delinquent borrowers that "has led to one of the most important changes in the lending market in recent years." In the hope that the recession would be short, many lenders have reduced scheduled mortgage payments to reflect borrowers' reduced income.

This is a win-win policy. On the one hand, the lenders are not just being "kind." They recognize that the costs of foreclosure are high and that amounts recovered in a forced sale are unlikely to cover the costs of foreclosure and loss of principle. As a result of this approach, the number of foreclosures nationwide has barely changed, in spite of the recession. This stability reflects the fact that the number of foreclosures as a percentage of past due mortgage loans "has fallen from a peak of about 30 percent in 1998 to 20 percent at the end of last year, one of the lowest levels on record."

On the other hand, consumers benefit very substantially. They do not suffer major losses on their investment in their homes and, very important, they do not end up with major black marks on their credit records. An important side effect of this policy has been that neighborhoods have not been blighted by boarded-up foreclosed homes, as in earlier recessions. Thus, the market value of other homes has not been depressed, leading to further losses if foreclosures become necessary. A combination of low mortgage interest rates and low foreclosure rates has raised the rate of home ownership in Richmond, VA to 76 percent from 62 percent five years ago.