The foreclosure moratorium by Bank of America, Ally Financial and Chase has sparked much discussion about if the idea is a good one which will help troubled homeowners or if it is bad for the mortgage industry and the economy as a whole. Barbara Novick with the Wall Street Journal recently wrote a piece about the foreclosure moratorium. Here are some highlights and thoughts from that article.
Fore one thing, addressing the fraudulent activity concerning foreclosures is definitely something that is vital to keeping the banks honest. However, the moratorium on all foreclosures that these banks own in all 50 states is not necessarily the best way to address the issue. Even when the fraudulent activity is dealt with and solved, we are still left with the problem that hundreds of thousands of homeowners are still having a great deal of trouble making their mortgage payments each month. By imposing the moratorium, it prevents homeowners from moving on from a home loan they can no longer afford. It only deters the inevitable for a short time and keeps the troubled homeowner in limbo financially.
Another problem that will be attached to the comprehensive moratorium is that investors will likely back out of future investments. The moratorium equivocally ends the contract between the lender and the borrower and the investor is the one stuck with a major loss. This moratorium could make investors think twice about investing the capital that the mortgage industry needs in order to help bring down the price of home ownership to a level that more people can afford.
As far as home prices are concerned, the foreclosure moratorium prevents the housing market from clearing its available homes for sale. As a result, this is going to bring home prices down even further which is going to hurt the average homeowner. Their homes are going to drop in value even more and if they try to sell it, they are going to find that they will get much less for it than what their original loan amount was for.
Programs in the past have promised to help people stay in their homes. Unfortunately, they have been dismal failures. Novick brings up the problem with HAMP, the Home Affordable Modification Program, which was introduced earlier to help troubled homeowners stay in their homes. This didn’t happen. The goal was to help about three million homeowners permanently modify their home loans so they could afford the payments rather than go through foreclosure. The program has actually helped less than 20 percent of its intended goal.
So what is Novick’s solution? She actually proposes one unlike many others who simply talk about the problem in their publication without offering a solution. Novick proposes introducing bankruptcy reform with a “special chapter of bankruptcy” which would be used specifically for the mortgage crisis and the people who need help with their home loan payments. This special provision would protect homeowners and investors. It would take the homeowner’s entire list of debts into account and then the court would make a decision about repayment based on a number of circumstances and factors. There would also be a “sunset clause” which would cause the bankruptcy to expire once the mortgage crisis was solved.
What do you think of Novick’s ideas? She goes further than just explaining what the problem is with the housing crisis and is trying to offer solutions. Do you have any solutions for the mortgage crisis?
Comments
John Q
October 20, 2010
How does a moratorium negatively affect prices of it reduces the supply of homes on the market? Homes in the foreclosure process cannot be sold, leaving the homes that can the only ones available for sale. It sounds good coming from an economist, but it smells like the second round of bank bail outs while making sure homeowners never get bailed out and even worse, homeowners pay a higher tax rate than capital investment multi-billionaires, so homeowners will be the ones hurting again when even more houses come up for sale in the market. It also smells like a shell game, banks trying to drive down property values by robosigning so banks can pick up millions of homes for pennies on the dollar to sell back at monopoly rates. Of course that assumes the housing market will ever come back, that We the People will ever see unemployment even below 7%. Banks owning houses that nobody can afford might make for some interesting slum lord arrangements, but that can hardly be good for America whose strength has been a strong business- friendly consumer class.
I do not know the right answer, but the last people I can trust are the folks who created this mess, making record income gains off of a nations dire pain. The same people who caused this mess and are advising against a moratorium are the same folks making record incomes in spite of a nearly collapsed economy, and since the high income bankers caused this mess what makes them right about not having a moratorim this time?
It seems that Big Business in America now views the economy as a zero sum game, as war between the middle class and the ultra-wealthy with the ponzi schemers making money both ways, and the bankers and the ultra wealthy obviously have the government in their pocket, so whom do we trust?
There is a way to correct the wrongs, to increase economic growth, to escape the zero-sum game fatalism, by raising taxes on high income earners. There is already too much supply and pitiful demand, and since capitalism relies on supply and demand equally, it makes sense to put more money in the hands of the middle class, and force the upper incomes to either invest in human resources, by hiring, or forfeit their ill-begotten gains through taxation and redistribution.
Its quaint to think of taking the hardline against America, the "tough luck Charley" mentality that the middle class deserves to crash and burn bringing down the USA into a third world nation status, that the rich figured out how to rip the rest of us off with a better mousetrap, therefore they deserve to win, but at some point the sheer number of people destroyed will create a backlash, and backlashes are always ugly.
If the wealthy are really concerned for America, if they really want to see economic wealth rather than be forced to invest in meaningless ponzi schemes with no real product or service being created, then the rich will have to part with a fraction of their dearly beloved cash. Already the top 0.1% of Americans make more than the bottom 120 million Americans combined, and anyone with half a brain cell can see that is unsustainable. Sadly the rich seem to rather see America crash than part with a mere fraction of their wealth for the greater good.
But come on, let us have more faith in the ultra-wealthy than that, let us have a tiny bit of faith that the ultra wealthy have some moral core, some sense of societal obligation. Show us your stuff rich folks, demand to pay more taxes to be redistributed into working people's hands and pocketbooks, and watch the economy rebound and watch your profits soar to new heights never before dreamed of. Use that wealth to unleash the economic engine of creativity, or suffer the eventual loss of wealth by losing your funds to ponzi schemers on Wall Street desperate to create some investment vehicle in spite of the pathetic lack of demand. Or, suffer the culmination of a nation borrowing far too much money from a communist country that will result in runaway inflation, then your billions won't buy a loaf of bread.
Since you ultra rich folk run the government, you are the only ones who can change things. Which colors matter more, Red White and Blue or Green? Don't answer... I don't want to know, just show us if you are game, or continue business as usual sit in your balcony seat nibbling caviar on fancy crackers, watching America fall to economic armageddon.
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October 22, 2010
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October 29, 2010
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