Daily Archives: July 14, 2010

Foreclosure Crisis – The Next Phase

The national foreclosure crisis is deep into the negative equity phase, as reported in the Christian Science Monitor this week.

Negative equity, that is, your home is underwater, worth less than you owe on it.

As I have been blogging for years, the answer is judicial mortgage modification, Congress amending Chapter 13 to allow the bankruptcy court to modify mortgage balances down to the value of the home.

HAMP has failed in its announced goal of avoiding foreclosure and keeping homeowners in their home.

Over half of the HAMP modifications are already in default.

There are several reasons.

One, people are told, you can keep your home if you pay us (mortgage company) X dollars per month.

Wanting to keep their homes, they say yes, but cannot really afford the payments.

Of course, the government program pays the mortgage servicers for doing loan modifications, whether they succeed or fail.

So the incentive on that side of the fence is to write a modification and get the check from the government.


Oh, that moral hazard thing.

The one the Federal government keeps violating by saving the “too big to fail” institutions that created this mess.

They made bad loans, hundreds of thousands of them, and the taxpayer bailed them out by taking over Fannie Mae and Freddi Mac, and TARP, and so on.

I do not understand where the moral hazard is.

If I am going to be foreclosed, and the bank takes my house, and sells it for what it is worth, that is fine.

But, if I pay them what it is worth, saving them all the costs of foreclosure, that is a moral hazard.

Using the Chapter 13 process means sworn statements of income and assets, and a trustee reviewing tax returns and pay stubs.

The banks failure to do the same is how they wrote so many bad loans.

And the government wants people to borrow and spend, spending what they do not have to boost the economy.

Well, that, at least is consistent.  Governments have been doing it for years.

Where is the economy going to be with 9 million more foreclosures, that many more taxpayers leaving their community, that many families moving.

Foreclosure Crisis – The Next Phase