Put Serious Foreclosure Prevention Options Back on the Table

This entry is cross-posted on the DMI blog.

Over the last two years, while home foreclosures overtook, torpedoed and then finally sank the economy, the White House and Congress took promises from banks to modify mortgages and passed them off as national foreclosure prevention policy. As my father would say, don't piss in my pocket and tell me it's raining.

Predictably, voluntary mortgage modifications have proven to be breathtakingly ineffective. So much so that the foreclosure crisis has exceeded the original worst- case predictions and has spread beyond the subprime market into millions of prime mortgage homes.

In this desperate environment, anything that resembles a sincere attempt from the federal government to address the foreclosure crisis is somewhat heartening, even when it comes so late in the game. For instance, there are news reports that what once seemed like politically dead idea - giving judges in chapter 13 bankruptcy proceedings the ability to force mortgage modifications - is beginning to show a pulse on Capitol Hill.

In other news, a Sunday article in the Washington Post reported:

Geithner is likely to roll out a plan, worth $50 billion to $100 billion, to encourage the modification of mortgages for homeowners who are otherwise at risk of being foreclosed upon. It could be based loosely on a strategy for foreclosure relief engineered by FDIC Chairman Sheila C. Bair when the FDIC took control of the failed bank IndyMac last year. Extensive details of how the plan will work may not be complete by tomorrow's speech, however.

This is indeed good news. But the foreclosure crisis is now so far along that it's going to take a potent cocktail of policy strategies to function as an effective medicine for what ails American homeowners in distress. In addition to the fact there is a crushing volume of bad loans, there are so many other challenges - like under-water mortgages, resistant loan servicers, securitizations that impede modification - that a simple loan-by-loan re-negotiation plan is a non-starter. Bankruptcy cramdowns and a Bair-like modification plan, perhaps in equal measure with other ideas once considered politically radioactive, like bank nationalization and a foreclosure moratorium, are all worth seriously considering.

Comments

[dcrinaz]

More than an economic stimulus is needed to end the recession. Bankruptcy law on primary home mortgages needs to be reformed, or the Stimulus will not have the desired effect.

Judges should be allowed to change the principal, interest and terms on primary home mortgages. Without this, lenders will continue foreclosures because they will not be compelled to do otherwise. Bankruptcy reform this month will provide the "otherwise­."

Lenders purposely exacerbated dropping home values by forcing foreclosures instead of renegotiating loans. Exactly because homeowners cannot declare bankruptcy on primary home mortgages, mortgage lenders forced homeowners to either pay up (which many cannot do because of the recession) or leave.

Mortgage lenders would rather endanger their principal investment by foreclosing on a home, thus losing monthly income along with hundreds of thousands of dollars of the home's value than let the homeowner stay in the home, make payments and keep the house off the market until prices stabilized. The lenders' choice to foreclosure on loans they could have renegotiated not only devastated families, but also destabilized the housing market, lowered property values and decreased public revenues. This loss in property values resulted in the loss of personal wealth which is at the core of this recession all Americans are facing.

So, doing the Stimulus without reforming bankruptcy law would be like tranfusing fresh blood into a patient, while not stopping his bleeding elsewhere. Bankruptcy reform will stop the loss of personal wealth caused by dropping home prices driven by foreclosures.