Realty Insider Blog

From The Economist Feb 21^st article title "Can't pay or won't pay?":

"Some 5M homes have entered foreclosure in the past three years. Credit Suisse estimates that over 9M more will enter the process in the next four years. (In normal times, new foreclosures run less than 1M a year.) Mr Obama predicts his plan will prevent up to 4M foreclosures. In a separate initiative, up to 5M borrowers will be able to refinance their mortgages at lower rates even if their equity is less than the 20% usually required by Fannie Mae and Freddie Mac, the now nationalized mortgage agencies.

Previous, less ambitious, efforts have flopped. George Bush's first plan aimed to help 240,000 delinquent subprime borrowers refinance their debts into government-backed fixed-rate mortgages. Only 4,000 did so. A Democrat-inspired $300 billion plan to guarantee 400,000 mortgages attracted just 517 applications, as lenders balked at the requirement that they first write down the principal. Private-sector programs have achieved higher numbers, but their success is mixed. Of 73,000 loans modified in the first quarter of last year, 45% were again delinquent eight months later."

As the article puts it later - the question is not only if borrowers can afford the payments on their mortgage - it is if they want to make the payments at all. With millions of homeowners having negative equity, and few or no ramifications for non-payment, homeowners that can afford the payments are defaulting and walking away as well (see my Buy and Bail blog entry.) A lowered credit score does not seem to be deterrent enough these days - and with a spouse there may be ways to work around the damage.

My solution is simple:
Set up a task force to prosecute criminally real estate agents, mortgage brokers, lenders and homeowners that aided in and committed loan fraud (remember those notices on the mortgage papers about it being a federal crime to lie on the application?) For people that can afford the mortgage but choose to walk away, convert the outstanding loan balance to a judgment against the person and their other possessions.  For people that were mislead, defrauded or is in a bad situation due to unforeseen circumstances, show compassion by allowing all or part of the remaining debt to be forgiven or deferred after a foreclosure or personal bankruptcy.

A bankruptcy court should be allowed to (and probably already is allowed to) discharge the remaining balance on a loan after a foreclosure if the person subsequently files for bankruptcy. The bankruptcy court can also force the sale of a home I believe. The nonsense that a bankruptcy judge should be able to write down the balance on an existing loan (and then keep the home) goes against all contractual law and what capitalism is about.

Enough nonsense - No to more bailouts and yes to larger sticks to make sure the unethical individuals among us have incentive to behave. The market will take care of the rest.