Posts Tagged ‘Foreclosures’

From a distance (wouldn’t it actually be nice to be at a distance from all this?) the U.S. economy seems to be in a death spiral.  Businesses are failing, people are losing their jobs, houses are dropping in value, banks are foreclosing on houses, the stock market has tanked again, AIG is getting another$30 billion dollar bailout, the list of bad news goes on and on.  Even worse, these pieces of bad news affect each other so that when unemployment goes up people can’t pay their mortgage and they wind up losing their houses – which in turn leads to the banks actually losing money because the houses are sold at auction, often at very low prices so the banks take a loss anyway.  Meanwhile, the growing glut of foreclosed homes on the market brings down the prices of homes in general and everything just gets worse and worse.

Is there any good news about all this? Yes, there is. The good news is that because all of these crashing markets are related in a vicious cycle this means that if we break one of the links in the cycle we can stop the whole process.  Of course, if we don’t break any of these links the whole economy will just spiral downward until it hits bottom.  It seems to me that we have an opportunity to intervene in this downward process in a way that could effectively halt the downward spiral of our economy and also create a huge benefit for many people who are suffering through no fault of their own, for example, people who have always been current on their mortgage payments but, because they have been laid off from their jobs, they are now facing foreclosure and even possible homelessness.

Let’s suppose our government intervened in the way the banks do business. Our government might as well, we practically own the banks now anyway.  Let’s suppose our government passes a law that forbids foreclosure. That’s actually not so outrageous. For example, suppose you go to the hospital for a heart transplant, but then, after the operation is finished, you find you can’t pay all your hospital bills on time. Is the hospital going to take back your heart?  No. In fact this is the way it is with almost everything we purchase: the seller doesn’t have the right to take back the object we purchased. That doesn’t mean we don’t owe the money – we still have to pay, but we get to keep the stuff we bought.  Not so with houses and cars.  Why? I don’t know; I suppose it goes way back to ancient British feudal law or something.  But it doesn’t have to be that way today.  We can think differently about the whole thing.  Suppose banks were told they are not allowed to foreclose on a house. Ever.  Period.  What would happen?

I expect the first thing would be that people would stay in their houses.  Second, the glut of foreclosed houses on the market would disappear.  Third, house prices would stop falling so drastically.  Fourth, the banks wouldn’t have to write off the value of these homes at such low prices because they wouldn’t be sold at foreclosure auctions. Fifth, the housing market would stabilize.  Sixth, people would start feeling better about the economy and the stock market would recover.  Seventh, people would stop being laid off.  Eighth, businesses would stabilize and start hiring again. Ninth, our economy would start to recover.

All we need to do is to break the cycle somewhere and stopping foreclosures seems like a really good place to start.  Everybody wins – except the banks, of course.  That’s because some people in these houses can’t make full mortagage payments.  That’s OK. They still have to pay some time or other.  They can’t just walk away from a debt they promised to pay. So the bank is secure in the knowledge that they will eventually get their money, just a little late, maybe.  So they can keep the mortgage on their books as a full valued asset.

But what about the liar loans? You know, the ones the banks made to people who had no income at all. Well, I’m sorry, the bank needs to take the hit there.  They made a really dumb mistake, but hey, didn’t we already bail them out of those?  How many liar loans did they make anyway?  It couldn’t be trillions of dollars worth, could it?  Even those bankers who were making only $100 million a year couldn’t have been that stupid.

Well, there you have my idea.  I think it would work.  We could start with a moratorium on foreclosures, and if it seems to work we could just go ahead an enact laws to outlaw foreclosures permanently.  In the process we would create a more stable economy, more responsible banks, and a more humane society.  What do you think?

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