In a troubled economy, banks are finding that an increasing number of homeowners are unable to meet their mortgage payments. Unemployment remains high, and those that have jobs may have seen their standard of living decrease dramatically. Loans that used to be available easily to borrowers are now more difficult to obtain. Home sales have slowed and those who do find a buyer often find themselves still owing money when the transaction is complete.
Borrowing, Then and Now
During the Great Depression, many homeowners were facing foreclosure due to the system of lending in place at the time. In response, the Home Owner’s Loan Corporation (HOLC) was established. HOLC created the system of borrowing that we see today. HOLC would spread the mortgages out over a longer period of time, usually 20-25 years. This allowed for more manageable payments, and it drastically cut down on the number of foreclosures.
This type of lending works best in a strong economy. The mortgage is designed based on the assumption that people will have continuous employment throughout the duration of the typical 30-year loan. But what happens when a borrower loses his or her job? The terms of the mortgage do not change, making it difficult for the homeowner to continue to make payments. If the period of unemployment lasts for a significant time, which is surely possible in a tough job market, chances are very high that the home will end up in foreclosure.
How to Address the Problem
Critics have called for a new method of lending that takes the reality of today’s economy into consideration. Changes to the system could include allowing interest-only payments during the period of unemployment. While this would extend the time it takes for a borrower to repay the loan, it will allow the mortgage holder to receive full value. Additionally, workers could be allowed to create a flex-spend account that will allow them to withdraw their contributions in the event they become unemployed. If they never need to use the money, it could be disbursed when the borrower retires.
For those who are unemployed, the changes could allow them to remain in their homes. Many borrowers are having trouble making ends meet. By allowing borrowers to make these types of changes, it may provide them with more options when they find themselves in dire financial circumstances.