Over the past two years, the Watchdog has repeatedly lamented the failure of the federal government to empower mortgage servicing agents to “cram down” the principle and interest owed on loans so that both reflected market conditions. This would allow families to remain in place and save lenders the huge expense of foreclosure, restoration of the premises, transaction costs, and sale at a big loss, aggregating as high as 30% to 35% of market value. The Watchdog has also opined that the government may be afraid to initiate such arrangements in order to protect banks from having to more realistically value their portfolios and thus put them in financial jeopardy due to lack of equity. It has been a policy of ‘look the other way’ and hope that over time the market will gradually right itself. Ominously, prices keep on falling.
It is flattering to note that Noble Award recipient in Economics Joseph Stiglitz in his best seller “Freefall, Free Markets and the Sinking of the Global Economy” makes so many of the same assertions as has the Watchdog, but he takes the issues additional steps suggesting plausible policies that the government should follow. (And recent legislation by the lame duck session of Congress enacts some of Stiglitz’s recommendations in other areas.)
Concerning the issue of how to help borrowers to remain in their homes while avoiding lenders taking too much of a loss, Stitlitz suggests a “home owners’ Chapter 11 bankruptcy” program. The amount owed would be reduced to market value or slightly below for mortgages “under water” (higher than current market value) but, upon the ultimate sale of the property, the lender would recoup a generous share of the proceeds that exceed the re-set mortgage amount.
Another approach, albeit more complicated, is for the non-recourse loans to be converted into recourse loans, which means the owners pledges all of their assets in exchange for reductions in principle and / or interest, with the possibility of added government inducements that would further reduce the monthly payments.
The sharp recession was brought about in large part due to a housing “bubble” which created a huge demand by unqualified buyers on the assumptions that homes would become more valuable year after year. The lenders did or certainly should have known better; many purchasers were ensnared and duped. Prosperity can only return after a way is found for the homes to remain occupied, mortgage payments to be made, and home prices to stop falling.
Wow Robert. Were you always a socialist in capitalist clothing? Now you are blaming the lenders for duping and ensnaring purchasers. Really?? So when they bought the property or refinanced, they were forced by the lenders to sign the documents? Oh yeah, now I remember being in my bank and seeing all the loan officers packing heat. In fact, at my bank they installed a “rack” for the really thoughtful borrowers who weren’t sure they wanted to be duped.
Seriously Robert, get a clue. Is your position on this due to you having substantial real estate holdings that you are being negatively impacted by the cleansing process? If so, then you need to disclose that as you would expect other publications, who you have criticized for lack of transparency, to do.
EDITOR: Our real estate holdings were not impacted by “the cleansing process.” According to Stiglitz’s chapter “The Mortgage Scam” there were 100% non-recourse loans, mortgages with “teaser rates” whereby interest is low enough to qualify the buyer but then shoot up, negative-amortizatoin loans which allowed the buyer to choose how much to pay back, and “Liar loans”, so called because there was no verification of incomes stated on the application. Would those originating and selling the loans been likely to have done so if they had to own them and suffer the consequences of future default?