Federal Reserve governor Elizabeth Duke on Wednesday called for efforts to not only increase loan modification and foreclosure prevention, but outlined some initiatives that might be used to deal with the segment of foreclosures politicians and industry players don’t seem to readily talk about — unavoidable foreclosures. These constitute a portion of borrowers Duke said “due to resources or circumstance” are unable to maintain mortgage payments and/or refuse to pursue reasonable modifications. “…I don’t believe we can fully formulate appropriate policy responses to the crisis unless we acknowledge and address the large numbers of foreclosures that are not avoidable,” Duke said in a speech given at a risk management conference in New York. “Just as public focus, experimentation, and policy debate have informed best practices with regard to loan modifications, we must also begin the work of developing responsible foreclosure and real estate inventory management protocols.” The Fed governor was careful to point out that, despite her views on such “unavoidable” foreclosures, she was eager to suggest efforts that can be taken to help borrowers than can avoid foreclosure through appropriate loan modifications. She also called attention to another under-discussed part of the housing market — borrowers that are current on payments. “One might be tempted to view these households as a lesser concern, but we must be mindful that they will be more likely to shift into one of the distressed groups if we do not reduce both the number of foreclosures and the cost of the foreclosures that do occur,” Duke said. She called on the industry to step up sustainable foreclosure prevention efforts. Servicers and lenders have been hesitant to write-down portion of the loan under Hope for Homeowners FHA refinancing program, for instance. Duke suggested Congress can eliminate the upfront premium and future appreciation-sharing agreement with the servicer. Congress might encourage more borrowers to participate by reducing the interest rate borrowers pay. She also said Congress could purchase at-risk mortgages in bulk and refinance them into the H4H or FHA programs. Congress might also use government funds to incentivize participation by servicers through a loss-sharing or a borrower payment discount-sharing agreemtn with servicers. Where these efforts fail and foreclosure is inevitable, Congress should take steps to reduce the costs of foreclosure, Duke said. Congress should seek to minimize the amount of time properties sit vacant and maximize the eventual selling price, according to the governor. Lenders and communities are “woefully under-resourced” to deal with the volume of foreclosures that are coming down the line, Duke said. Financial institutions might also play a role in alleviating the burden by initiating clear policies on deeds-in-lieu-of-foreclosure to release any borrower unable to repay of their obligation and avoid costly foreclosures. She also cited cash-for-keys initiatives and programs to allow people to remain in the homes as renters rather than owners as other steps that can be taken to help those borrowers incapable of repayment while at the same time keep them out of foreclosure. Read Duke’s speech. Write to Diana Golobay at diana.golobay@housingwire.com.

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