Could A National Mortgage Strike Change Foreclosures?

A mortgage strike has started in Cleveland, but will this idea spread nationwide? Will it reduce foreclosures or mortgage rates?

According to the Cleveland Plain Dealer, a local group called Empowering and Strengthening Ohio’s People (ESOP) believes that “banks should reduce the principal on underwater mortgages because home values have fallen so far in Northeast Ohio.”

Although it’s easy to be sympathetic to the Cleveland strikers, a local or national mortgage strike is unworkable.

Mortgage Strike

In Cleveland the strike idea is to deposit monthly mortgage payments in an escrow account held by a local attorney until the loan owners agree to principal reductions — an action akin to a rent stoppage. The logic is that lenders should reduce the size of FHA, VA and conventional mortgage debt because home values have fallen. With less debt there would be fewer foreclosures, short sales and REOs.

While this is an attractive thought the logic is weak — you can pretty much bet that no property owner would agree to larger loan amounts if home prices were now rising.

The Cleveland approach is also hobbled by the fact that not making mortgage payments is a sure way to damage credit. As the Plain Dealer explains, “the so-called “mortgage strike” would be similar to a rent strike, in which renters place their payments in escrow with the court until landlords perform repairs or take other requested actions. But rent strikes have a basis in law; mortgage strikes do not. That means participants risk destroying their credit ratings or losing their homes to foreclosure.”

Mortgage Rates

What would make sense in Cleveland and elsewhere is a general mortgage restructuring which would be open to anyone who had a “seasoned” mortgage,  a loan which has been outstanding for several years and where payments have been made in time and in full for at least a year. This is the basic approach used by HUD with its FHA Streamline refinance program.

The FHA program is attractive because it cuts monthly mortgage payments, it pays off the existing loan in whole and it does not damage anyone’s credit.

While a mortgage strike to lower principal has a certain allure it just isn’t an effective idea and in too many cases would target community banks, credit unions and federal loan programs that did not sell toxic loans. The better approach is to work for something that’s obtainable and beneficial, two qualities which can easily be associated with a general refinance and lower mortgage rates.


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