Consumer Law

The Wrong Foreclosure Plan

By Alan White

By Alan White

All indications are that the Administration will announce a foreclosure plan next week that consists largely of throwing taxpayer money at investor losses.  This is as wrong-headed as it could possibly be.

Absent from all discussions are any proposals to stop, delay, or reduce the number of foreclosures.  Loose campaign talk about a moratorium seems to have been forgotten.  Remember those "troubled assets" that are dragging down the financial system?  Many are linked to mortgages are currently valued based on the the last 3 to 6 months' performance, which consisted largely of foreclosing mindlessly at 50% to 60% loss severities.  The value of bank assets would be enhanced, not further diminished, if mortgage servicers, with some help from bankruptcy courts, stopped foreclosing and started writing down mortgage debt to sustainable levels for every homeowner willing to make payments.  There is absolutely no reason to fork over taxpayer dollars to cover 25% losses on loan modifications, when investors are today absorbing 60% losses on foreclosures.

Three ingredients are necessary for a successful foreclosure plan.  First, foreclosures have to be stopped, for a long enough period to work out every salvageable loan.  Second, servicers must be compelled, by bankruptcy or other legislation, to write down mortgage principal and interest for every homeowner who can afford her house.  Third, any taxpayer funds should be used to compensate mortgage servicers directly for good performance, i.e. for successful sustainable modifications.  The servicers, not the investors, are making the (wrong) decisions now about foreclosures.  Changing their behavior can stop the simultaneous housing and banking catastrophes, and do far more for investors than Treasury payments or guarantees.

Full post as published by CL&P Blog on February 06, 2009 (boomark / email).