One of the most disappointing policy initiatives of the Administration to date has been the expensive and ineffective attempts to fight foreclosures at all costs.
The net impact of this is to artificially prop up home prices and reduce the number of real estate transactions. In the high foreclosures regions (California, South Florida, Arizona, Las Vegas), the foreclosure process have driven prices down to the point where buyers have materialized and sales numbers are improving significantly. The uptick in real estate transactions benefits durable good sales, increases mortgage volume, and positively impacts other real estate related activities.
As wrenching and unpleasant a process as foreclosures may be, the net impact of artificially high real estate prices is even more problematic. It punishes savers and first time home buyers (think Newlyweds).
This is what makes the latest proposal out of Treasury — found here: Supplemental Directive: Foreclosure & Bankruptcy Changes — so disappointing. It seeks to mandate Foreclosure Abatements and Mortgage mods. These (and other related) policies that have shown themselves to be ineffective, and ultimately, counter-productive.
Some of the highlights of the proposal:
• Mandate a 30 day freeze on foreclosures until a delinquent borrower is evaluated and found ineligible for HAMP;
• Once a borrower is in a mortgage mod program, “servicers must stop all foreclosure action” during the trial period;
• Banks must produce “written certification that a borrower is not HAMP eligible” prior to proceeding to foreclosure;
• Requires servicers to consider borrowers in bankruptcy for HAMP’ (!?!)
• Removes other bankruptcy barriers for mortgage mods;
In this proposal, all 60+ delinquent borrowers (who meet eligibility) must be solicited for HAMP. Even newly bankrupt mortgagees should be considered for mortgage mods.
The problem we have in housing is that over the past decade, 5-10 million people bought homes they cannot afford. Many of these homes are now worth less than their underlying mortgages.
The best options in these cases are: 1) A negotiated capital cost reduction (i.e,, “cramdown”) with their lenders; 2) A short sale; 3) Walkaways.
The Treasury Department proposal accomplishes nothing more than keeping people in homes they cannot afford with payments that are onerous. The mortgage mods are failing in huge numbers because lowering the interest rate and or/extending the terms does not address the basic issue . . .
Coming Soon: 5 Million More Foreclosures (February 16th, 2010)
Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)
All prior foreclosure posts can be found here