A lot of people would be able to afford their mortgages if they could reduce their interest rate to current interest rates and/or refinance to a 30-year or 40-year mortgage. The problem is that banks don’t want to make new loans to people underwater on their mortgages, even though those people already have loans. We’ve spent several years pushing banks to make mortgage modifications, and banks have refused. So let’s offer mortgages directly on conservative terms for everything except the loan-to-value ratio. That ratio is the only real problem, and it’s only a problem because OMG what if the person doesn’t keep paying their mortgage and you have to take their house as collateral and the house isn’t worth enough, even though refusing to allow refis is vastly increasing the risk of default. But as a society, we don’t want foreclosures, so let’s put policies in place to avoid foreclosures by offering better mortgages.
The underwater problem could also be solved by using eminent domain. Problem: homeowner has a house worth $200K, but owes $500K on their mortgage. Solution: government seizes the house, pays the bank fair market value of $200K, and sells it back to the homeowner for $200K. This has been floated as an idea in California, and the only significant argument against it from mortgage lenders is that they’ll stop lending if the government does that. See paragraph above.
Thursday, October 18, 2012
Tired of the foreclosure crisis?
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4 comments:
The eminent domain trick forces banks to fully realize the loss on the loans immediately. If this is done on a large scale, the banks will likely not have the capital to survive. While I don't opposed refinancing plans, forcing an immediate haircut onto the banks alone is likely dangerous.
The nice thing about eminent domain is that it can be done piecemeal. A city here, a county there, and they can choose to only do 100 properties at a time. There would be a whole lot more willingness to offer refis if the banks knew there was a worse-for-them alternative available.
Or you could just use the threat of it to force refis... Announce that you will use emminent domain in a neighborhood if x% of underwater mortgages are not refinanced within 6 months.
I'm glad to see that the White House used this week's radio address to talk about acting on my first paragraph:
http://www.whitehouse.gov/refi
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