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.