Consumer Law

Rethinking the Foreclosure Plan

By Alan White

By Alan White

This story in the New York Times paints a grim picture of the Obama/Geithner foreclosure crisis response.  The main theme is correct:  without reducing principal balances, no plan will keep homeowners in their homes.  A kind of standoff has resulted from the banks' insistence that principal reduction be paid for by taxpayers, and the understandable reluctance of the Administration and Congress to pay for losses banks would otherwise bear anyway if they just continue foreclosing. 

In the twelve years before the crisis, total mortgage debt in the US tripled, from about 3.5 trillion to more than 10 trillion, reaching its peak of 10.5 trillion at the end of 2007.  The good news is that it is now going down.  The bad news is that it is still at 10.3 trillion as of the third quarter of 2009.  The economy cannot recover until we realign this debt hanging over American families with lower, sustainable home values.

This central issue of the crisis calls for leadership.  It calls for the President and the Treasury Secretary to end the impasse between banks and bailout opponents, to craft a reasonable plan that maximizes debt reduction through modification rather than foreclosure, with the minimum necessary taxpayer subsidy.  In my view, the plan will require considerably more stick, and perhaps only a tad bit more carrot.  Enacting bankruptcy stripdown of mortgages to property values wouldn't hurt either.

Full post as published by CL&P Blog on January 04, 2010 (boomark / email).