Imagine No Foreclosures... (It's Easy If You Try)

All it would take would be a little legislation.

How about this: Let's have a federal bill that states that any bank that took a bailout loan and hasn't paid it back yet isn't permitted to foreclose on anybody's primary residence. In addition, bonuses for senior officers at lending institutions will be reduced by a factor tied to its foreclosure record for that year. High rate of foreclosures would mean low bonuses. At the same time, institutions that refrain from foreclosing on people's homes would be granted tax abatements on their profits indexed to the amount they are putting at risk by allowing homeowners to renegotiate their loans and remain in their residences.

Of course, passage of such a law would also involve responsibilities on the part of defaulting borrowers. For instance, no resident would be permitted to simply walk away from a house simply because its market value had fallen 10% below the size of its mortgage. That seems to be happening all over the place right now. That's not good. Lenders have rights, too.

In short, a spirit of enlightened responsibility and mutually assured destruction must be re-established on both sides of the equation -- lender and borrower alike. They say you can't legislate these things, but they're usually wrong. Just about everything can be. They say that short-term, mechanistic fixes aren't organic to the system and can't be sustained. Really? Tell that to the guy I just gave five bucks on the way to work. He's having breakfast on that right now. Not to mention all the banks that just reported record profits, who got their own handouts not long ago.

The situation as it exists is dire. People are out on the street. Banks own a bunch of worthless real estate that's flooding the market, just sitting there. Stupid banks made stupid deals with hopeful people. Together, they made their bed. Now they should be forced to lie in it, side by side, until this long night is over.

Any lawyers out there are invited to improve on the basic structure of this concept. And any politician who wishes should feel free to appropriate it and take credit for it. Isn't that what you people do?

 

Follow Fortune's Stanley Bing on Twitter: www.twitter.com/thebingblog

Comments

[TJCole]

There are a number of solutions to this abomination, and I was working on it before the bottom fell out addressing then the sub primes primarily, if we had a president who cared about the American people these would still be doable but Obama gave away the store to his banker masters and obeyed them implicitly so millions must suffer this terrible trauma he seems immune too...!

This will be the greatest displacement of Americans, in our nations history long before it's over...

I'm battling the flu now so haven't got the head for it but it was well received as a real solution by several governors..and even bankers...

Still why isn't a so called Community Organizer fighting for these Americans and drawing America's attention to their plight...

Ask yourself what would Dr. King say of this, if he was still alive...?

[MrMaus]

Wouldn’t it be great if everything were so simple? So, let’s ask the hard questions.
Does the borrower have to pay interest on the debt outstanding? Is the borrower obligated to pay the contractual interest and principal on the note? If the answer is “No” to either question, then why would anyone (even those that can afford to) pay on their mortgages.
If you can afford to pay, then you have to? Who decides affordability? How is affordability measured?
Most of the time the contract signed between the two parties allows the borrower to walk away (most mortgages are non-recourse) and allows the note hold to take possession of the property. The buyer rarely “owns” the property (if you put 10% down, the Bank owns the other 90%). You slowly buy the home form the Bank by paying principal down and you pay interest on your loan. It is fair.
If you want to really make it a game changer, how about having the Bank trade some of the debt for equity. Reduce the payments by reducing the principal of the note but the Bank gets some of the upside if the property increases in value from the current point. Now the borrower and the lender are actually partners because an increase in the value improves the lenders position. You could even give the borrower the right to buy the equity back at a fixed price plus implied accrued interest if things get a lot better.

[mbaty]

Legislation of this type is really just coming to a fair agreement. It's absolutely doable.

[The Meek]

Thanks for your opinion Mr. Bing. I would also like to complement you on your writing skills. You can be very concise and still be entertaining.

[dnpvd51]

I guess people that do not own homes just do not count.

So I guess you want to allow people that own homes to be allowed a free option on their house. The price goes up, the homeowner wins and the price goes down the taxpayer(renters) lose.

[Sitco]

"Lenders have rights, too."...ha!

As a homeowner who bought his house as new construction in 1997 and is today sitting with a decrease of 27% of my initial investment (yes, my purchase price, not the inflated bubble value), it's hard to think of lenders sympathetically. The glut of bank REO properties. mostly purchased during the bubble at inflated prices, have skewed comparable values enormously for all homes.

So who blew the hell out of this market? Lenders approved increasingly inflated mortgages. For borrowers, let's not forget, with the buying/lending frenzy, there were no "low cost" alternatives when anyone wanted to buy a home. It's not like borrowers opted for the $500k house instead of the same home accross the street for $50k. Lenders were richly compensated with each inflated mortgage, and they're not feeling any pain on the way down. Borrowers gambled on the golden-egg and lost. But, borrowers weren't gambling; they were "investing wisely"! Based on lender's approving ever increasing mortgages on the same properties, the get-rich (or, the "can't lose") mentality was enabled : "Why not buy as much as you can qualify for; it will return MORE when you sell in 12 months!"

At a minimum, lenders need to "force a floor" for the marketplace by listing/selling their REO properties at a set and less devasting percentage below their foreclosed mortgage amount versus liquidating them at current market rates.

[wietog]

I like it. Or - if a bank must foreclose on someone, they could hire a property management company and let the occupants pay rent until they can afford to buy it back, or if they wish to leave after some time in the future (when the market has stabilized), the bank can sell for a profit.

The money spent on property management and the income from the rents could stem this cancer.