Megan McArdle throws a wrench in the running gears of foreclosure assistance with her “lunatic proposal for the day.” Specifically:
…why not make it easier to move homeowners out of homes they can’t afford? Set up a streamlined foreclosure proceeding where a current or mildly delinquent homeowner can simply give the house to the bank and walk away. Do this with two legal provisos:
1. No tax on the forgiven loan
2. No black mark on the credit record. The bank marks the loan as fully satisfied.
The homeowner gets a fresh start, and the bank gets the house without the huge administrative costs that are normally associated with foreclosure. Everyone loses something, but no one loses a crippling amount, and there is no net transfer between two parties who are both in financial trouble.
It is sort of novel to target the admittedly burdensome administration costs rather than the losses themselves. Some courts are already adopting similar means by running “rocket dockets” and processing thousands of foreclosures a day- I can smell the lawsuits from over here though. One thing that is appealing about McArdle’s proposal is that it doesn’t attempt to perpetuate any fantasy that:
1. We can inflate asset prices at will with no longer-term consequences.
2. We can stave off foreclosure indefinitely.
Damning with faint praise [Asymmetrical Information]
I know that when I am wearing my finest pin stripe banker suit and have lent on a $800,000 house I’m going to be much more worried about the $30,000 admin costs than the $300,000 drop in value! It all makes sense.
@1 – you have a point; but at the same time you can’t squeeze blood out of a rock. If the person is going to walk or declare bankruptcy, you probably would never get the $300,000 back from him or her anyway. On top of that, there are some states where purchase money mortgage is non-recourse.
So in the end, that $300,000 is sunk cost; you might as well save the $30,000 you can on administrative cost.
“Mildly delinquent” sounds similar to “quite certain”. Great idea, take delinquency and ignore it (no “black mark”) so that the speculator can go back-in when they recover enough for a 10% downpayment on another foreclosure auction home and re-boot their “investment” when the market starts to appreciate. Brilliant. Not.
-SC
Make mortgages full recourse till the day the borrower dies, and then too take it out of whatever assets the borrower leaves behind.
The only thing saving europe from collapsing right now is that people cannot just walk away from loans like then are here.
@1 – you have a point; but at the same time you can’t squeeze blood out of a rock. If the person is going to walk or declare bankruptcy, you probably would never get the $300,000 back from him or her anyway. On top of that, there are some states where purchase money mortgage is non-recourse.
So in the end, that $300,000 is sunk cost; you might as well save the $30,000 you can on administrative cost.
Rick Santelli for U.S. Senate. President Obama, are you listening?
Too lazy/busy to read the full article right now, but is she presuming then that there are enough rental/move in with parents/friends opportunities for the displaced to relocate, or will new facilities need to be built/converted from condo/home to rentals?
@6…..Best comment of the day! Throw the MN and all is BS ferry dust ideas into lake MI before we are all in soup lines!
To Anal_yst-
Most areas in the US where a lot of these foreclosures are occuring don’t really have the rental inventory available anywhere.
The solution would be for the banks to simply rent back the houses to the owners at what they can afford. However, since the banks would be taking in rent that is lower than the mortgage payments they were getting, they would have to write down the house… Which is what they were trying to avoid in the first place.
Banks aren’t even processing the foreclosures at the slow speed they’re allowed to. They’re in absolutely no hurry to recognize losses that would make them insolvent for accounting purposes the way they already are in reality.
Is every delinquent borrower considered a “Homeowner” or do you just have to be delinquent on a mortgage of some sort?
I ask because I forgot to pay a Comcast bill 2006 (moved states). I didn’t find out about it until last year when I got a free credit report. The bill was for approx $120….should I pay this? try to get a cramdown? wait for the second home rescue plan?
Signed,
Confused
She actually does think we can inflate asset prices without consequence, because that’s what she’s doing when she suggests that people’s credit ratings should not be hit.
You know, everyone is a critic.
Its not an ideal solution but its thinking outside the box and its
better than anything we’ve seen thus far.
buy the mortgage on the cheap – 30-50% par, pay $10k to the deadbeat owner, kick ‘em out and tell if they leave peacefully, without trashing the house, their credit rating won’t be destroyed and then sell the house for the new market price. banks lose, new buyer wins, process gets moved forward rapidly. we need to let housing prices sink like a rock til they hit bottom, whereever that may be, otherwise we’re just dic*ing around.
@6, maybe he can take Burris’ seat?
One of the problems is the number of proposed plans out there. Some cause the homeowner no pain, some the banks, some the bondholders. Everyone is sitting around doing nothing in hopes that a future plan will be better for them than the current options available.
Until there is a plan that spreads the pain, and is forced on the banks, bondholders and homeowners, everyone will reject it and hold out for a better deal. Nothing will be done, and the problem will just fester.
Just pick one, good or bad, because doing nothing may be the worst choice of all.
It’s pretty good but I would limit the “free pass” to the amount by which mortgage balance exceeds currently appraised value (yes I know this will breed corrupt valuations practices on both sides — might need to apply a per square foot valuation by zip code to avoid).
That’s fairer than having Obama pick our pockets to pay the deadbeat’s mortgages, and then have to do it again when they fail.
Also –my friends (teacher and firefighter) just closed on a house in Queens they bought out of a foreclosure for $279,000. It’s a stretch for them, and they have to rehab to get the certificate of occupancy from the city (the former owners trashed the place) But they wouldn’t be able to buy a house at all on their incomes in this city without foreclosures. That’s the true price of the house now.
So why is Obama making people like them pay extra in taxes to prop up the prices so that houses don’t get foreclosed, and these people wouldn’t be able to buy a house??? It’s really worth about $279,000.
That’s fairer than having Obama pick our pockets to pay the deadbeat’s mortgages, and then have to do it again when they fail.
Also –my friends (teacher and firefighter) just closed on a house in Queens they bought out of a foreclosure for $279,000. It’s a stretch for them, and they have to rehab to get the certificate of occupancy from the city (the former owners trashed the place) But they wouldn’t be able to buy a house at all on their incomes in this city without foreclosures. That’s the true price of the house now.
So why is Obama making people like them pay extra in taxes to prop up the prices so that houses don’t get foreclosed, and these people wouldn’t be able to buy a house??? It’s really worth about $279,000. the true middle class has been priced out of NYC. Let housing prices crash and firefighters can buy houses…
Easing foreclosures would lower home values further (a good thing in my book), but that would further destroy the House of Cards the govt is trying to prop up.
The govt probably isn’t in denial (Geithner was sitting at rhe table for the demise of Bear and Lehman), but they realize there can NEVER be a Mark to Market for home prices, nor the underlying mortgage “assets,” or everything unravels.
This is a $150 Trillion problem, and the govt is pissing on a 5 Alarm fire.
We’re genuinely on the brink of Great Depression II. Odds of averting one are about 50/50.
maybe we have a great depression every 100 years or so…
19 Try and put this in your small little head: the point of mortgage assistance (like TARP and any other other government program that’s attempting to get us out of this mess) is that money spent on the bailout will pay off in terms of significantly less pain and economic cost in the future. Its that simple, bozo.
@11 nails it:
Banks aren’t even processing the foreclosures at the slow speed they’re allowed to. They’re in absolutely no hurry to recognize losses that would make them insolvent for accounting purposes the way they already are in reality.
Fine use tax payer $$$ to buy the dead beat idiots mortgages but one thing-
We should all get a list of those homes like the Megan’s Law website and we shoud be able to use their bathrooms whenever the fuck we want!
So where does everyone live in the meantime when – en masse – they all vacate the homes they foreclose on?
26: wise up dope, the bank would go ahead and negotiate out a deal with them if they had any reasonable cash flow, so the house won’t be empty. Banks are so uncreative, they should never foreclose in a big down market, always better to go ahead and postpone payments, move to balloon, anything. The banks are paying the collective price at this point for ever thinking foreclosure is a viable option.
And another thing, any rational recovery plan would include massive incentives for moving families into all those unoccupied homes and completing the tracks that currently sit in some 25-75% state of completion. Empty homes and uncompleted tracks are very bad for home prices and curing both situations would be a great place to start building a recovery.
The feds can temporarily soak up some of the excess housing inventory by subsidizing demand with financing support. But those houses are still part of the market, and at prices set by personal income levels and the availability of credit.
We can take the hit to housing values now, and know it’s over when they start to rise. Or we can take it later, and get a later, slower recovery with signals confused by government intervention.
Still worse, when this doesn’t work the feds can construct still _more_ schemes to prop up housing values.
@28 – “Uncompleted tracks are bad for housing prices”?
Er, why? Because the streetcar doesn’t come to your door any more?
@28
Increasing inventory in this massive slump is the worst thing the government can do. Affordability continues to be the main issue, and with jobs disappearing so fast, there’s little that can happen to stop the sinking demand.
You’ll see tent cities developing before all those exurban tracts and houses get fully populated.
Well, that’s already happening:
http://www.msnbc.msn.com/id/26776283/