What the Economy Needs Now is More/Faster Foreclosures
Recently I read the following quote about how to “save” the housing market and the overall economy:
Indeed, Casey Mulligan, an economics professor at the University of Chicago, argued that both the Bush and Obama administrations had focused too much on making house payments affordable, based on income levels, and not enough on reducing debt.
Here’s a great way to reduce debt, GET OUT OF IT.
For some reason all those people who are walking away for their houses (or are threatening to do so) seem to understand that much better than the government who keeps trying to keep people in debt. Further proof that people understand this is shown by the high rate (>50%) of re-defaults by people who were already helped once. (high recidivism rate).
Given that the public is embracing this approach to solving their own problems maybe the solution should be making it EASIER for people to actually walk away.
Here is why this is a potentially great (and new-fangled) solution. At the heart of the current logjam is that different people are upset about approaches to saving the economy for different reasons. Here are the most prevalent of those arguments:
- Bailouts help the evil banks by having the government make their bad (or worse yet fraudulent) investments almost whole.
- Bailouts reward individuals who were irresponsible.
- Not propping up housing prices will keep unemployment high because any economic recovery will be hampered.
- Taxpayer money shouldn’t be used to help those (individuals OR banks) who took egregious risk with no downside.
So if we look at making it easier for people to walk away everyone gets a sense of satisfaction (but also has to contribute to the pain). Specifically:
- Banks will have more foreclosures on their hands (pain) but they won’t have the overhead of formal foreclosure proceedings because the owner willing ceded the property (benefit). Also they won’t face increasing pressure from the government to abrogate contracts (and deal with the lawsuits that will inevitably follow) with their investors.
- Homeowners who walk away give up the asset they treasured (pain) but get to move on to a life where they don’t have day-to-day financial worries of this magnitude (benefit). Also they can quickly make amends for that one-time lapse in judgement like a hangover cure or the morning-after pill.
- Unemployed homeowners get the added benefit of being able to go where the jobs are and NOT be stuck in a house they can’t afford in an area where they can’t work. Their pain and their benefit is having to relocate.
- Taxpayers – In the short-term home prices will drop (pain) but will quickly recover as a new wave of buyers can finally jump in and this won’t cost them a single nickel (benefit).
How can this be accomplished? The government needs to create a “credit amnesty” program where people have a fixed time (6 – 12 Month period) to walk away from their houses without any penalty on their credit reports and no taxes on forgiven debt. Just write it off and start over. They also need to find a way to faciliate faster foreclosures. Finally (and there would be some additional taxpayer pain in this) the government could offer tax credits for moving expenses. This has two benefits. One it facilitates the move for both sellers (underwater homeowners) and buyers (to pick up those homes that are now available but in a different area), not to mention it funds jobs for movers.
The added bonus to this plan, like King Solomon dividing the baby, is that the truly committed long-term homeowner will surface. They are the ones that will, of their own accord, make whatever sacrifice is needed to keep their home. Those that aren’t committed will simply take the opportunity to walk away and start anew, also a laudable goal.
Granted I’m not the biggest fan of this idea but in the spirit of shared sacrifice its the best I’ve seen so far and much better than any artificially cramming down of interest rates and principle balances. So I vote for this.
(Follow Me on Twitter at watchingmarcitz)
(Having problems with your Toyota. Learn how to get more for your troubles)
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This entry was posted on April 15, 2010 at 3:47 pm and is filed under Just the Facts, Stories with tags bubble, debt, foreclosure, foreclosures, homeowner, housing bailout, invisible renter, king solomon, new york times, recidivism, recidivism rate, Tara Siegel Bernard. You can follow any responses to this entry through the RSS 2.0 feed You can leave a response, or trackback from your own site.
April 18, 2010 at 5:28 pm
Not a good idea. Lenders would be unfairly screwed by changing the rules in the middle of the game. The government not propping up home prices is fair but changing credit reporting is insane.
Who loses? Everyone who is prudent since obviously the market has to reprice risk and the folks with good credit scores would lose since those scores would mean less… Either banking will end or banks will be demanding 40-50% downpayments and/or recourse loans backed by wages and not just the property. And who could blame them. If the government allows people to walk away without even a hit to their credit ratings.
The answer to this problem is easy.
1) Don’t change the rules in the middle of the game. The foreclosure crisis will be solved within 2-3 years from now since not many replacement homes are being bought. Peak foreclosures are expected to hit in less then a year.
2) Higher capital and less leverage ratio for banks, investmenet banks or any financial entity partly subsidized by the government. This will hurt banks profits but so be it.
3) Raise LTV standards so everyone has to put at least 10% down on a first home and perhaps 30% down on a second home….Phase in these requirements.
4) End all government subsidies for home ownership. Phase this out. Even the interest rate deduction should be abandoned. This will keep home ownership affordable.
April 19, 2010 at 2:40 am
I actually agree but fear that we are in the midst of the government over-rotating to out-and-out abrogation of contracts so I’m trying to find a middle (Albeit distasteful) middle-ground.
April 16, 2010 at 11:18 am
The no credit hit idea is just silly. People take credit hits for being late on $23 magazine subscriptions but nothing for walking away from $300,000 of debt? There are market prices for credit and people who have paid their debts fully and on time should not have to compete for credit on an equal footing with people who dodge their debts. As for not taxing forgiven debt as income, we are a democratic society and tax laws are approved by our duly elected representatives. Still, it is difficult to follow how a forgiven debt isn’t income – it sure looks like income on a balance sheet.
April 16, 2010 at 11:45 am
I agree there is distaste with this idea (mine included). Unfortunately I get nervous that if there isn’t some sort of middle-ground (with distaste on all sides of the argument) we’re going to have a much worse solution (e.g. Federally mandated cram-downs of principal). I hope we don’t even have to go this far but I’m just trying to find some middle ground to end this and move on.
April 16, 2010 at 4:00 pm
My belief is that the way to get the log-jam moving is for the Federal government to convincingly get out of the mortgage modification activity in a very public manner. Have Obama hold a prime-time news conference and say that his administration has reconsidered this and is withdrawing all support. Possibly once lenders understood that nobody was coming with a bag of money to allow them to hold the loans at book value they would take a harder look at what would give them the best results from their loan portfolios. Since the federal “cram-down” would almost certainly be accompanied with tax dollars flowing to the lending institutions to make up the gap, they are playing a waiting game now. If they felt there was no reason to wait, maybe they wouldn’t
April 16, 2010 at 4:15 am
I just walked away from a 300k nightmare in Chicago and it feels really good. I have been able to save over 30k which was enough to buy a bank foreclosure outright, but in a better area.
I really don’t need credit anymore, because I’m saving 4k every month so if I can’t afford it I can just save for it. Not being financially strapped is great!
I realize that eventually I’ll have to file bankruptcy, but in the mean time I will save my cash (but not in a bank account).
April 16, 2010 at 7:24 am
Good job! You did the smart thing. Make sure you title the newly owned unencumbered house in a trust, corp or some entity other than your name to prevent leins against it after the bankruptcy.
April 16, 2010 at 4:25 pm
You are a gem. Thank You!
April 16, 2010 at 2:54 am
I am a frustrated renter waiting for prices here in LA to be reasonable. But (no offense) your idea wouldn’t work.
Giving a “no credit hit” holiday to everyone would make it attractive for *everyone* who is underwater (not just those who aren’t committed to homeownership) to walk away. Even if I were a committed homeowner, if I could walk away from a seriously underwater home – with no credit hit – and buy a similar house next weekend for a lower price, I’d be a fool not to.
The banks may be greedy, but they’re not stupid
April 18, 2010 at 9:44 am
Completely agree! Plus people made stupid decisions, they gotta pay for their mistakes! That’s how life is.
April 16, 2010 at 1:14 am
this is far to reasonable and rational.
April 16, 2010 at 4:55 am
My exact thoughts when I read all this. It would be too sensical for a government to actually do something so effective and relieve its citizens. Everyday I ask myself why not do just what a family would do in such a case… cut its budget for unnecessary large expenditures i.e. Military, NASA, Bailouts to banks and save the citizenry. When their plan doesn’t work and the shit hits the fan, what will that look like?
April 16, 2010 at 7:37 am
We are currently experiencing a bailout bubble. It’ll only last until the fed runs out of stimulus money, which will probably be this fall. Then this bubble too will burst just like the housing bubble did in 2006, and before that the dot com bubble of 2000. America has been on life support since 1994 when our moron government passed the treasonist NAFTA act. You are best looking out for your own security, because no one else will do it for you.