The other problem is that current homeowners may see a lot less sting in foreclosure...especially the ones who are facing big increases in their payments due to '2/28' loans and the like. Some who could make the payments might be tempted to let the scaled back foreclosure go down and enjoy paying rent...perhaps even later on adding insult to injury by 'buying' the house again after home prices start collapsing.

This leads us to the problem at hand today which is not so much an army of homeless people created by foreclosures in the 500K+ housing market but lenders not wanting to make loans today. Why would they start making loans again if you introduce a program that essentially makes it all the easier for people to get away with nor making their mortgage payments?

I know my program has the same weakness but at least it is targetted towards areas that are in danger of seeing a price collapse which is something mortgage holders do not want.

Posted at August 23, 2007 2:04 PM in response to Own to Rent: The Way to Save Subprime Borrowers

1. The idea is not to help any particular mortgage but just to prevent a run on neighborhood housing stock where everyone attempts to sell or foreclose at once. In that regard it doesn't really matter if Bank A has never yet foreclosed on a single house....if the neighborhood has already suffered 20 foreclosures it's adding more wood to the fire.

I think as a temporary measure it is actually more fair to the individual case. Like a bank run, those participating in it would like to stop but they don't for fear that the other guy will get his money out first and leave nothing left on the table for them. Drastically falling property values actually cause more foreclosures and lead to more harm to mortgage holders (because they cannot recoup their investment and have to write off balances).

2. Individual counties/states could do this or it could be done on the national scale. Any county that wants to 'opt out' could simply take the revenue generated from the 'fees' and refund them back to the banks doing the foreclosures. Perhaps some counties would want to do this in the hope that banks would offer mortgages for better rates. I would have the fee revenue go to the local towns to offset property taxes...that would hopefully act as a slight push up in property values to counter the downward push of foreclosures.

A reason I would do it on a national scale is that it would be easier to end the problem and I would want it to end. A macro policy really should be implemented on a macro level. I would want it to be less like unemployment insurance or bank deposit insurance and more like FDR's 'bank holiday'. Another issue is that on the local scale such a scheme might be unconstitutional....I'm not sure about this but I suspect one could argue that it might represent a state disrupting the enforcement of contracts. Put this in on the national scale with an expiration date of, say, two years, and it will be very hard to renew unless a huge portion of country just fell in love with it.

Robert Brown

I don’t know why a decline on housing prices in an area should result in more foreclosures. Why would someone who could afford to make his mortgage payments default on his loan simply because his house had declined in value? It seems that the mortgage company would be more likely to foreclose on properties with a high market value since they could easily be sold to pay off the mortgage.

There are many mortgages that were written as 2/28. That meant fixed payments for two years, then variable for 28. Why would someone do that? Take someone with medium to poor credit. They make two years of managable fixed payments then after building credit (and possibly some equity from rising home prices), they can now refinance for a new fixed rate before the killing variable payments kick in.

Now what happens if home prices fall? Even if everything was perfect the falling prices mean less equity, maybe even negative equity. No mortgage company wants to take on a loan like that now. Even if they did, the market right now is making credit hard even for people with excellent credit. So yes falling home prices means more foreclosures even for those that were fine.

Now take a step back, consider someone with a fixed rate mortgage, making payments just fine then he loses a job. Before he might be able to miss a few payments and refinance bringing him current again. But if home prices collapse then this fellows equity is taking a hit making it all the harder. He will be stuck with his current company who are likely to be unhappy about him being behind....when they consider prices are falling they may say to themselves we better get this house sold now rather than risk that six months from now the write off we are going to have to take will be $50,000 rather than $30,000.

You are right in that if everything is going perfect and the guy is making his payments perfectly the bank cannot foreclose just because prices go down.

Posted at August 21, 2007 12:43 PM in response to Own to Rent: The Way to Save Subprime Borrowers

What I don't like about this plan is that it ignores people who are relatively invisible here. Those are the people that are going to benefit from this shakeout. Who are they? Not huge hedge fund managers or people who are in mortgages that do not qualify for Fannie Mae protection... They are the people who will be able to purchase homes once prices return to a normal level again. The foreclosure sale isn't a happy event but there will be plenty of people who will be able to pick up a nice home at a decent price at them.

What is the point of giving people a new property right to rent foreclosed property? If they can afford market rent then they can either make a deal with the bank to rent the house until the bank sells it or they can go to a similiar house and rent.

I would consider a temporary intervention in the market. Specifically charge a fee for every foreclosure that happens in a neighborhood in a year. In other words, the first foreclosure would be for normal cost, the second would have, say, a $2000 fee, then $4,000, $8,000, $16,000 and so on. This would have the effect of slowing down a 'run' on the sheriff. Such a run could cause home prices to drop dramatically in a small area causing even more people to end up in foreclosure. Slowing down access to the foreclosure windo would force mortgage holders to use it first for cases of true fraud or where the owner just will not or cannot make payments For those that are making payments the incentive will be to restructure the loans to give them time for the market to settle and secure a refinancing.

But the model here is similiar to a run on a bank. Remember the run on the S&L in It's a Wonderful Life? Emergancy measures were introduced to stop the run (George got just about everyone to only take out what they really needed). But once the run was over business returned to normal. It wouldn't have been a good thing if those emergancy measures were always in force.

Posted at August 21, 2007 6:45 AM in response to Own to Rent: The Way to Save Subprime Borrowers