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More Calls for Direct Action on Foreclosures

In the latest issue of The New Yorker, James Surowiecki weighs in on something TWI wrote about recently: The need for a new — and bolder — foreclosure strategy. Foreclosures continue to outpace loan modifications, even as the Obama administration presses the lending industry to do more. And in some communities, it’s not just the new foreclosures causing problems; it’s all the vacant and abandoned bank-owned properties.

As we noted, the time is ripe to try new tactics to combat foreclosures, including encouraging ways to rent foreclosed homes back to former owners. Fixing tax laws that are slowing down some loan modifications might help. Even direct loans to homeowners could be a strategy.

Surowiecki agreed:

If we really want to keep people in their homes, then, nudges and renegotiations probably aren’t going to do it. We need more direct action. One option, which the banking lobby killed earlier this year, would be to allow “cramdowns”: let bankruptcy judges reduce the principal on homeowners’ mortgages. Another, even more direct option is simply to give aid to homeowners: one proposal would have the government make low-interest loans, or even grants, to people who have suffered a steep decline in income and have negative equity in their homes. That would target the aid at the people who need it most: as another Boston Fed paper shows, defaults are most likely to happen not just because interest payments are set too high but because of income shocks (usually after the loss of a job) and plummeting house prices.

Surowiecki pointed out, as we did, that forceful actions to help homeowners might not be popular; no one wants to pay off their neighbor’s mortgage. But as foreclosures continue, the spillover effects on surrounding neighborhoods will become more severe, which may change that attitude.

But in the end, Sur0wiecki says, the Obama administration will have to come to a conclusion it hasn’t reached yet: Fixing the roots of the crisis is going to be costly. The government seems to be in denial on this. The current view is that “we’ll just keep muddling through with the current approach, which offers us the sense that we can get quite a lot without spending much,” Surowiecki said.

Maybe it’ll work. But the housing bubble was very expensive. It’ll be surprising if we can deal with its consequences on the cheap.

More reasons why it’s time for the government and the lending industry to quit trying to just muddle through the crisis and really rethink foreclosure strategies.

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