How the Great Recession birthed a powerful two-punch formula for mortgage debtors

The Great Recession began with the Federal Reserve reducing interest rates to very low levels in an attempt to stabilize the US economy.  The Fed held low interest rates through 2004.  In combination with other policies to encourage home ownership, the cheap rates and accessibility to money helped to create a steep boom in real estate and financial sectors.  Subprime mortgages and adjustable mortgages allowed borrowers who might not have qualified otherwise to obtain generous home loans based on expectations that interest rates would remain low and home prices would continue their ascent indefinitely.

Then in mid-2004, the Fed steadily increased interest rates in an attempt to maintain stable rates of inflation.  As this occurred, access to credit moderated and the rates on adjustable rate mortgages and other exotic loans began to reset at much higher rates.  The result – the great “housing bubble bursting” in 2007.  The over-leveraged banks’ solvency came into view with the collapse of Bear Stearns in 2008.

Out of the Great Recession came relief for consumers of mortgage loans including:

  • Uniform Standards and processes for outreach to delinquent homeowners
  • Widespread availability of independent and expert housing counseling and legal services to help homeowners improve their financial situations, resolve delinquencies, and avoid foreclosure
  • Increased delegation authority for servicers to make loss mitigation decisions based on clear investor guidelines;
  • Standardized and transparent “waterfalls” for determining the order in which loss mitigation options are offered (e.g., reinstatement, repayment plan, forbearance, modification, short sale, and then deed-in-lieu of foreclosure);
  • Standardized and transparent waterfall steps (e.g., interest rate reduction, term extension, principal forgiveness/forbearance) that are applied to modify the mortgage payment
  • Systems that allow coordination between first and second lien holders to holistically address a homeowner’s mortgage situation
  • Post-modification counseling to help homeowners remain current under their modified mortgage;
  • Principal reduction programs for underwater homeowners to reduce negative equity and monthly mortgage payments;
  • Strong compliance and oversight functions by federal agencies;
  • Opportunities for engaging with stakeholders that represent varied viewpoints and interests to be considered when developing loss mitigation options.  

These tools allowed many debtors to use the power of filing bankruptcy petitions and requesting mortgage loan modification packages (otherwise known as mitigation applications) to stay in their home.  From a macroeconomic perspective, these tools allowed the US economy to increase aggregate employment and begin down the road to recovery.

If you are interested in a mortgage modification, or have questions regarding filing bankruptcy, please contact us at (804) 423-1382.