Okay, Lets Get Serious

I've been neglecting my blogging duties a bit lately, but I think this is worth mention. NPR briefly discusses the Bankruptcy Bill and how Lenders say it will hurt homeowners. [listen here]

This is tricky. The bill would give Judges the ability to rewrite the mortgages of those who are about to go into bankruptcy. My outlook may be a little pessimistic, but the only outcome I can see coming from this is disaster. It's one of those sitcom-like situations where something goes awry and every goofy elaborate plan to make things better snowballs into a bigger mess, and when the credits roll we've all learned a valuable lesson about dealing with the consequences of our actions from the get go.

Maybe it is time to say enough is enough, but I don't think Judges are the right people to make these decisions. Our court systems have more pertinent problems. The thing is, foreclosure (especially now) will hurt everyone. Lenders are going to lose money on foreclosed upon property, and it's obviously a negative outcome for the homeowners. I think flexibility is going to be a major factor in how the housing market will bounce back. HUD has given incentives for lenders to mitigate losses on foreclosures. Most lenders are willing to be flexible, but home owners need to approach them for help. One of the problems is most home owners don't do this. I'm sure all the stat-spewing and scaremongering doesn't give someone in financial trouble a lot of hope, but even aside from the HUD's role, Lenders have reasons to not want to foreclose.

One reason would be that most often, when a mortgage is signed, it is immediately sold and repackaged as an equity. The mortgage payments goes toward a pool that is payed out in dividends and a piece of the cash flows go to the holding firm as compensation. When a home is foreclosed on, this stream of cash flows is gone. Another reason is the fact that, even if a Lender doesn't resell the mortgage note, they will face a loss on the value of the home. It is not a sellers market right now, so when a bank forecloses they often end up reselling the property at a loss, not to mention the fact that they have to endure expenses such as maintaining insuring the property until it is sold.

If I could give the Dems that are pushing this bill a word of advice it would be patients. There is no quick fix and it needs to be understood that this problem will be burdening the economy for some time. There isn't much sense in further complicating the issue and trying to manipulate markets with no idea of the unintended impact it may have. Some measures may help in lessing the severity of the problem, but it isn't going to just disappear. If anything, it would be helpful to keep home owners from walking away from their mortgages and realizing that Lending Institutions are most likely willing to work with you. And for those watching from the outside while biting your nails, just remember this too will pass.


Update: Megan McArdle mentions Fannie Mae's 3.6 trillion fourth-quarter losses and the Office of Federal Housing Enterprise Oversight's announcement to lift the caps on its portfolio. Check it out.