Federal Reserve Governor Elizabeth Duke gave a speech Wednesday, in which she first said lenders and the government need to do more to help people avoid foreclosure, but then said some foreclosures are unavoidable. I can’t be sure, but that may be the first time a federal official has made such a statement.

Of course, the government could stop any foreclosure. What has been missing from the debate is the costs and benefits of foreclosure prevention programs, and that in some cases borrowers should walk away. These are people who owe much more than their home is worth and their income is much less than their household payments. The debate should be, and should have always been, to define “much.” And part two of the debate should be what to do with properties seized by banks, whether the magnitude of the problem justifies government involvement.

Given the likely number of properties that will enter foreclosure and the time and resources involved in the foreclosure process, financial institutions can help minimize the cost by developing clear policies and procedures for approval of short sales and deeds-in-lieu-of-foreclosure. For homeowners who cannot, or no longer wish to, stay in their homes, such strategies would release them from their obligation and avoid foreclosure. Some institutions offer a so-called fresh start or cash-for-keys program, in which they provide a payment to consumers in exchange for voluntarily surrendering the deed to the home. Such arrangements reduce the cost of foreclosure and effectively provide the borrower with funds that can help offset some of the expenses associated with relocation. Other lenders are offering borrowers the option to remain in the house as renters rather than owners. Options such as these could be offered in conjunction with loan modification programs as further inducement for borrowers to engage in loan resolution discussions. complete story

Source: OCRegister - Mathew Padilla