Loan Modification Programs - Success?

With another wave of foreclosures hitting the market, it might be time for a lot of homeowners to face a hard and difficult reality.  The big "F-word" is something nobody wants to speak about because of the harsh stigma attached to it.  When I asked some fellow acquaintances what the word "foreclosure" meant to them, some of the popular words were "poor," "dirty," and "lots of work."

That, to me, is unfortunate.  Those words place a stereotype on the millions of Americans that are going through a difficult situation, and are having to use this as a last resort.  Does that make them poor?  No.  Does it make them or their home dirty?  No.  In fact, I applaud the many people who have fought to the death to do everything they could to keep their home.

Unfortunately, the resources available to those homeowners have more bark than bite.

The Troubled Asset Relief Program (TARP) was funded by the government to help absorb the overwhelming number of foreclosures set to hit the market.  This past week, the Congressional Oversight Panel explained that TARP funds were to be used "...in a manner that protects home values, college funds, retirement accounts, and life savings; preserves homeownership and promotes jobs and economic growth; maximizes overall returns to the taxpayers of the United States."

So was it Mission Achieved?

One of the ways TARP was set to protect home values (both of those consumers in financial crisis and those who weren't) was through the Home Affordable Modification Program (HAMP).  It was supposed to prevent three to four million foreclosures.  To date, the plan is on track to help only 700,000 to 800,000 homeowners.  That would be about 25% of the goal - you be the judge.

Another program initiated to help was HOPE for Homeowners.  Established in 2008, it permitted the FHA to insure refinanced distressed mortgages.  Due to poor initial design, lack of flexibility, and reliance on voluntary principal, it was only able to help a handful of families refinance.

Success is measured on different scales by different perspectives.  TARP was set up to help home values from being crushed under the blanket of foreclosures.  In my opinion, the only thing it seemed to do was delay the inevitable.

Foreclosures vs. Your Home Price

Yes, it's hard.  It seems, now that we're coming out of the Eye of the Foreclosure Storm, that you see them everywhere.  You see domain names such as cheapproperties.com or stealahome.org.  The media sends a flurry of information down our televisions, computers, radios, and smartphones telling us that we're in for another wave.

Through all of this mess - has anybody told you how that affects YOU as a homeowner?

Unfortunately, there are two ways that a foreclosure or short sale can impact your home price.

1.  Distressed Properties impact the appraisal of your home
If there is a low amount of distressed properties in  your area, it is likely that your property value will be minimally impacted.  In fact, some experts say you may have appreciation due to this phenomenon.  By definition, a "low amount" would be anywhere between 10%-15%.  Once the foreclosure or short sale market hits more than about 30% of your market area, it is safe to say that these become the new "norm."  Buyers will look at all prices around you, and make decisions based on the "bang for their buck" ideal.

2.  They are discounted competition directly next to you
Of the five negotiable parts of a contract, price is, perhaps, the biggest component.  Every consumer, whether it be a home or a grocery item, wants the best deal.  According to RealtyTrac, foreclosures (on average) sell for a 41% discount and short sales for a 19% discount.  Though most people think these "distressed properties" are trashed and gutted, at sizable discounts they turn out to be more appealing than a normal sale.  Every buyer purchasing a distressed property is one less buyer for normal sales - and less demand in the market with an oversupply of homes means lower prices for you.

If you're a buyer, the field is all yours.  As a seller, it will be important to discuss with your real estate professional your financial bottom line.  This not only paints a bigger picture for you, but also helps guide you through a tough market to list a home in.