From Housing Story:
A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.
Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.
“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.”
The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications…
Normally, an “ambitious call to government arms” is to be avoided – but, in this case, it will take government action. If you go in to the linked article, you’ll see some suggestions (including forced reductions of principle balance), not all of which I agree with. Back in July I put out what I think is the best plan possible, though I am sure others can be devised.
To nutshell my idea, I would have foreclosed houses being placed in a pool to have them leased out for two to five years, if at all possible to the people who were foreclosed on. The idea here is to keep the houses off the market, thus allowing a bit of stability to come to the housing market – while also allowing people to stay in their homes, resume paying for their residence (while going through foreclosure, a person doesn’t pay at all – while once foreclosed, the rent would be significantly less, in most cases, than the previous mortgage payment), and rebuild their credit so that in a few years they can re-enter the home buying market. The key thing to understand here is that while the economy is down, demand cannot recover – so, as we can’t help demand, we must reduce supply.
I would also change a few other things to redress the balance of power between borrowers and lenders. Right now, lenders pretty much run the show, especially as they can afford pricey legal counsel while most borrowers can’t. As a for-instance, I would allow genuine “deed in lieu of trust”, so that a borrower could surrender the property to the bank with no adverse credit and no residual balance to pay – this, I think, would make the banks more willing to actually work with distressed borrowers who really can continue to make at least some payments (a lot of people have reduced income rather than no income in this economy). There are other things along this line which can be done.
Housing in America has utterly collapsed. The only reason houses retain any value at all is because we’re essentially pretending that they do. Given the real inventory of unsold homes in America and the paucity of demand, everyone’s house is pretty much worthless except at fire-sale prices. Eventually this will all catch up with us and the resumption of the housing crash would be devastating to an already very weak economy. Better to act pro-actively to find new solutions to a problem which was decades in the making.
We can’t allow things to drift, nor can we count on the banks to fix it, nor dare we allow liberals to run a class-warfare program where foreclosures are just stopped (that would be even more disastrous than allowing them to continue – if there is a moratorium on foreclosures, a lot of people would stop paying just because of that). We have to think about what we want, and then have the courage to act. Right now, I doubt we have anyone in charge who has either courage or intelligence – but that may change soon.