The Case for Doing Nothing About Foreclosures « The Washington Independent
Should we do nothing about the foreclosure machine? That’s the argument today from Lex at the Financial Times. It’s the opposite viewpoint to our TWI story on Tuesday, which detailed president-elect Barack Obama’s plans for more aggressive efforts to help homeowners, including mass loan modifications.
Lex concludes in a piece called “Foreclosure of a Dream” that none of it will be worthwhile:
What should policymakers do? The only approach that has so far appeared to slow the rise in subprime and Alt-A mortgage delinquency numbers has been the $100bn worth of Federal tax rebate cheques distributed over the summer. Giving borrowers greater notice before foreclosure, as California recently forced banks to do, merely delays the inevitable. Meanwhile, research by the Federal Reserve of St Louis suggests that modification of mortgages, while politically popular, provides only a short-term fix. Changing the rules of the game discourages future lending by the banks. Until an end to the recession is in sight, there is very little that can be done.
I think it’s too early to conclude that. Studies on loan modifications are hard to hold up as conclusive, since the success of a loan restructuring often depends on the quality of the modification itself. Redoing loans merely as repayment plans — the Countrywide solution — usually leads pretty quickly to failure, but reducing the amount of debt can make a difference.
The problem is that we haven’t tried mass loan modifications before, so there’s very little research on how well they work. State attorney generals and others monitoring loan modifications say they’re making progress, little by little, learning more as they go about how to get restructurings done, and how to make them successful.
So let’s not write off loan modifications yet. Still, Lex has a point. I don’t think anyone sees modifying loans as the only answer to the foreclosure crisis. They may help some people stay in their homes – which is better than nothing – but there still are waves of foreclosures ahead, and it’s hard to see how loan modifications alone can keep up with all of them.
Lex says: Do nothing, endure the pain, wait for the recession to end. I don’t believe we have the patience for that. Instead, foreclosures will cause such economic pain, I think, that the government might finally step in to do something bolder – like create another Great Depression-style Home Owners’ Loan Corp., to refinance mortgages and prevent foreclosures.
We’ve seen all sorts of other government bailouts. The housing market, as even Lex concludes, is as the root of this crisis. Shouldn’t the government think big when it comes to foreclosures, the way it has for banks, insurance companies and Detroit?
The continuing housing meltdown that Lex chronicles may answer that question.