Is a Shift in Strategy for Fighting Foreclosures Ahead?

Is the Obama administration planning a major shift in strategy for slowing the foreclosure rate? Reuters reported Tuesday that officials are mulling policies to let delinquent owners rent their homes back. On Monday, Reuters said the administration also was considering letting unemployed borrowers defer, delay or skip mortgage payments so they can stay in their homes.

Both ideas are interesting, if not outright promising. And as TWI reported on Monday, the time may be ripe for a shift in strategy in the housing crisis, which is only getting worse despite previous government efforts to curb foreclosures, such as loan modifications.

Reuters had only a few details of how the new ideas, which seem very much like trial balloons, might work.

First, on renting homes back:

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes, but would continue to live in the property for several years, the sources told Reuters.

Officials are mulling several ideas on how to swap a homeowner’s loan for a rental lease without disrupting mortgage markets.

The government could pay mortgage service companies cash to take part in the program — or encourage lenders to sell the homes to a third party that would write rental agreements — under two scenarios under consideration.

Many non-profit agencies manage affordable properties and might be interested in partnering in such a rental program, said John Taylor, the president of the National Community Reinvestment Coalition.

On allowing unemployment homeowners loan breaks:

The (Obama Administration) official told Reuters it was reasonable for policymakers to consider options for loan forbearance — allowing borrowers to delay, defer or skip payments — that are more effective than those currently available in the private sector.

But the official said the idea, which is still evolving, was difficult from a policy perspective and carries potential hazards. It could help more people struggling with economic difficulty, but it also could create perverse incentives that distort the housing market, said the official, who did not want to speak on the record about internal administration debates.

The official said such a program would be in keeping with other measures to help workers who have lost jobs in the current recession.

At The Atlantic, Daniel Indiviglio was wary:

The logistics get ugly. How long do you allow deferrals for? If unemployment is likely to remain high for another six months, or a year, can you allow mortgage payment holidays to last that long? Maybe by perverse incentives, that source means that if the deferrals extended until employment is finally found, then people would have an incentive to remain unemployed. That’s easily remedied with a time limit, however. But then you also face the problem of just deferring many foreclosures, instead of preventing them: once that time limit expires, those homeowners might still be unemployed and unable to make payments.

Beyond the relative merits of these ideas, the bigger issue is that there’s a sense that it’s time to try some new and far more forceful tactics, even controversial ones. The New York Times today, for example, calls on the Obama administration to go forward some bold action on the economy.

Unemployment is rising. Foreclosures are surging. Lending is still constrained. So why exactly is the Obama administration waiting to act?

A stubborn lack of progress in stopping foreclosures clearly is pushing Washington to consider some stronger responses. Whatever bold action the administration might come up with will run into criticism and opposition. So be it. It’s a little late to get into philosophical discussions about the government’s correct role in propping up the economy. We no longer have the luxury of figuring out a strategy that keeps everyone happy. The time may have passed to ponder moral hazards. Foreclosures are spilling over onto everyone, and dragging the entire economy down, and not just in the short term. As housing expert Alan Mallach told TWI, we’re coming to the realization that we can’t “loan modify” our way out of this.

It’s time for the Obama administration to push forward with another strategy. Actually, as foreclosures pile up and neighborhoods suffer, it’s well past time.