Since the beginning of the foreclosure crisis, two main camps developed. On one side, financial institutions – such as lenders and servicers – are constantly blaming borrowers for not being able to make payments of previous agreements. On the other side, realtors are blaming lenders and servicers for tying their clients to worthless properties through innovative financial products. Both sides demonstrate legitimate concerns but lack the fundamental “know-how” to solve the problem.
Financial institutions are profit generating organizations. They are based on the idea of pooling funds which are to be used towards business transactions in order to generate a massed profit margin. Profits are used to pay for operational expenses and whatever left is distributed on the original owners of the pooled funds as dividends. Unknown to most homeowners, the biggest investors in real estate pooled funds are insurance companies and retirement funds.
Realtors generate profits by selling properties to potential buyers. Realtors need financial institutions that are capable of attracting and encouraging buyers to make offers. The current mayhem within the lending industry greatly hampered realtors’ bottom line by reducing the pool of potential buyers while maximizing the number of potential listings. In economic terminology, the supply-demand equilibrium had been set out of balance creating havoc in normal market conditions. As a result, buyers’ expectations are out of sync with the current real estate market.
While both sides battle each other out through lobbying groups, distressed homeowners – the ultimate victim – are still suffering. According to the latest numbers from Making Home Affordable Program, more and more delinquent borrowers are dropping out of the program. Major financial institutions are limiting their efforts to help borrowers through the creation of more red-tape. Moreover, the political scene had witnessed a shift of focus as democrats and republicans block each other’s efforts in hope of winning public favor.
From the beginning, efforts of the different groups – borrowers, realtors and financial institutions – were focused on blaming the other groups. Distressed borrowers blamed realtors, realtors blamed financial institutions, and financial institutions blamed homeowners. The government tried to enact laws to curb the cycle of blame only to enlarge it by having all sides blaming the government and the government enacting regulations against all three parties.
How can this crisis be solved? First, we need to stop the blame game. Blaming has created a negative psychological effect by enforcing unfounded heuristics relating evil intentions to the parties involved. It is important to foster feelings of dependability and trust in order to encourage cooperation among the parties (government, buyers, realtors and financial institutions). Second, shift the focus from recovery to restructure. Currently, government’s programs are seeking to assist distressed homeowners retain their property. But, retaining doesn’t translate into long term affordability. Mortgages need to be resized to fit actual value either through reformation of financial calculus or creating a forgiveness gap enforced by federal government – the real arbitrator of power. Third, homeowners need jobs in order to afford making any kind of payment. The same is true for financial institutions that need employed workforce in order to pool funds. And forth, real estate knowledge must be implemented within the fabric of society. This can occur through high school education or by requiring potential buyers to take a number of courses. If all four solutions are enacted, American housing industry can – and will – experience a faster recovery.