Serious Studies

Imagine No Foreclosures (It's Easy If You Try)

Foreclosure

All it would take would be a little legislation.

How about this. Let's have a federal bill that states that any bank that took a bailout loan and hasn't paid it back yet isn't permitted to foreclose on anybody's primary residence. In addition, bonuses for senior officers at lending institutions will be reduced by a factor tied to its foreclosure record for that year. High rate of foreclosures would mean low bonuses.  At the same time, institutions that refrain from foreclosing on people's homes would be granted tax abatements on their profits indexed to the amount they are putting at risk by allowing homeowners to renegotiate their loans and remain in their residences.

Of course, passage of such a law would also involve responsibilities on the part of defaulting borrowers. For instance, no resident would be permitted to simply walk away from a house simply because its market value had fallen 10% below the size of its mortgage. That seems to be happening all over the place right now. That's not good. Lenders have rights, too.

In short, a  spirit of enlightened responsibility and mutually assured destruction must be re-established on both sides of the equation -- lender and borrower alike. They say you can't legislate these things, but they're usually wrong. Just about everything can be. They say that short-term, mechanistic fixes aren't organic to the system and can't be sustained. Really? Tell that to the guy I just gave five bucks on the way to work. He's having breakfast on that right now. Not to mention all the banks that just reported record profits, who got their own handouts not long ago.

The situation as it exists is dire. People are out on the street. Banks own a bunch of worthless real estate that is flooding the market, just sitting there. Stupid banks made stupid deals with hopeful people. Together, they made their bed. Now they should be forced to lie in it, side by side, until this long night is over.

Any lawyers out there are invited to improve on the basic structure of this concept. And any politician who wishes should feel free to appropriate it and take credit for it. Isn't that what you people do?

51 Comments Add Comment

It is not really a legal question. It is in fact an economic question that has turned into a political issue.

There should be a special place for the people that flipped and frauded and upped the prices through false appraisals, took the loans fraudulently with no intention of repaying, lied to mortgage lenders on their loan applications, then walked away from the properties with cash in their pockets leaving entire communities overpriced, abandoned and yes, in foreclosure.

That place is hell and they can all go straight there.

Bing,

In Canada, we don't walk away from our houses. It's not in our DNA. And banks don't forclose, only in a rare exception do they want your house. And they did not need bailouts. Have your politicians look to the north for help. We're always happy to share.

You might want to consider that on health care too.

Bing,
I like most of your ideas, except one: High rates of foreclosures would mean low bonuses for senior officers? Why should they get any bonus at all? Most of us who work for a living are not rewarded (given bonuses) for not doing our job properly. We're lucky to even keep our jobs. It's a good thing I'm not pulling any strings at those lending institutions. I'd fire every last senior officer who had a hand in allowing the foreclosures to happen.

Bankruptcies and foreclosures work. Trying to avoid them is intuitively appealling, but it really just prolongs the pain.

Japan lost a decade when they wouldn't let asset values correct to their natural level. Maybe we can get away with losing only a half-decade if we suck it up and take our medicine.

That said, I also believe in eating your vegetables before you get dessert, so maybe I'm just out of date. Compassionate conservatism didn't work, and compassionate restructuring probably won't work either.

Stanley,

I think your idea is outstanding, but it has no chance of being implemented because the politicians are too busy cozying up to Wall Street. Look at the bazillions we've given them, no strings attached. No accountability on either side.

The banks get money from the Fed for free, charge us 20% on our credit cards, and pocket the diference. As I look around the table searching for the sucker, I don't see him. Oh yeah, that means it's us.

Thanks a lot New York and Washington. You got yours.

Bing,

I am not saying you are wrong, but good luck at getting your "spirit of enlightened responsibility." If we had that, we wouldn't have ever gotten into this mess.

Oh, wait. I say "we," but I am not really in this mess directly. I was responsible when I got my mortgage, and I am still paying my mortgage, no government assistance required.

Sadly, there are many who may not have been as reasonable in the past, though, and now everyone has to pay for it.

Is this column still written by a business person?

Yes, Tony. Thanks for asking.

To Dave in Toronto:

You obviously did not live in the province of Alberta in the early eighties. People, by the boat load walked away from their homes. Please don't be so smug.

K

Bing.. in an ideal world where there is justice, such things might happen....but this is America and in the real world, small people and taxpayers are fair game for everyone to take advantage of.

Human nature and business are pretty much in tune with each other. Screw the other person,,not because you want to, but because you have the ability to do so...

Rapacious bankers making fraudulent deals with equally larcenous clients.

The lone qualifiication for a mortgage green light in 2005 was the ability to draw breath. I've since learned that even that was negotiable.

I planned for a 33 percent retrenchment. We're currently down 40, and a report I read today says that Miami-Dade property values could drop another 30 by mid 2011.

Now that's amore!

For Toronto Dave sung to the tune of Oh Canada:

Holier than thou,
We don't walk away,
From our mortgage vow,
It's not in our DNA!

We see thee rise,
Oh interest rates,
Underwater by a ton,

Bust a cap in the ass
of my thieving banker,
But in Canada, I can't own a gun!!

God keep our Docs,
from running to the States,
Oh Canada you're so superior to me!
Oh Canada you're so superior to me!

Let's bash a seal, get our Speedos ready for the beach and play some hockey!

You know Tony, I was just going to ask that myself.

Bing, I think you need have add that for each foreclosure the bank must have agreed to a home mortgage. On a side note, how many corporations would tie bonuses to efficiency or good will? Besides GE and Motorola. Most companies reward those who hit their budget and nothing more...

Chicagosail...you're quite correct; compassionate conservatism didn't work. I'm in favor of hanging the bankers that participated in this scheme. I'm not speaking euphemistically...I think they should be hung (OK...I'm compassionate enough to support lethal injection or insertion in the general prison population for such dirtbags).

In my many decades of life I've found that business people talk the tough talk as long as things suit them...but let things get rough and they scream worse than those they'd accuse of being welfare scum for government help. Effing hypocritical pussies.

In fact, I bet the most 'conservative' of you would be an excellent boss butt-kissing poster child on 'Boss's Day'.

Tony, the earlier business people realize that the world also functions on principles that weren't taught in the narrow confines of whitebread B-Schools, the better off we'll all be.

Greed has its place, but create a situation where many millions of people have nothing to lose (as it appears we are now doing), and see how your stern looks (and Fox News based diatribes) over your WSJ rattle their cage. Keep it up long enough, and you'll release a disaster of old testiment proportions.

I'm looking forward to it....should be most entertaining!

Bing, your Chicago working class roots are showing in this particular blog...(just as they did in the your memories of Ted Kennedy). Some might think that's a failing....I think it's evidence of character and basic human decency. You've been quite successful in life, but I don't think you ever lost track of those who haven't been so lucky.

What most of these schmucks don't realize is that when they see people hurting on the streets it's quite often a case of 'but for the grace of god, allah, buddha, whatever....go I'. You display a most endearing humility. Do you want to be a chump? Certainly not, but neither do you have the overwhelming sense of entitlement that pervades typical business mass psychology.

Most of these guys couldn't survive a few days in a real labor environment.....they have neither the strength or fortitude to handle sustained adversity. They've led favored lives....sure they may have worked hard in the synthetic environment of higher education to punch their 'upper class union cards'....but that just honed their obnoxious sense of superiority.

Ready! Roll the torrents of working class experience while you went to school! Tell your tales of the phenomenal workload that humbled your lower-class brethren and temporary work-mates (you know...before you were selected to be be one of the Horatio Alger 'chosen ones'). Give me your 'rags to riches' stories of inspiration!

Right

The government continues to feed deficit, or borrowed money, to those with voracious appetites creating an obese culture.

Is it any wonder that consumers are in hock, up to their ears, to the credit card and mortgage companies?

Is the message: Feed the greedy and screw the needy?

We've been cast into a cement jungle with a failed infrastructure and dried-up resources with wireless life lines.

All we have left is a Starbucks and the latte, "Duh"?

Oh, wait, the government will provide, will be our famous last words!

My earlier comment wasn't based on personal feelings or lack thereof. It was based on the fact that prolonging the inevitable often doesn't work. Like lending money to your kids or relatives: theoretically it makes sense but it usually ends badly.

Keeping people in homes with mortgages that they can no longer afford doesn't make sense. The legal construct exists to fix it, and it's called foreclosure. It's messy, takes time and is painful. But it has worked for decades and it continues to work now. Banks don't undertake it lightly (especially when they know it will be tough to sell the collateral), so there is a measure of built-in protection for borrowers.

Other alternatives (such as negotiated mortgage relief) are intuitively appealling but practically very, very difficult or impossible to implement, especially when there are multiple mortgages involved. And forcing some sort of settlement program on lenders violates the sanctity of personal contracts that has been a cornerstone of law in America.

Although mortgage relief could work if the government wants to offer a big carrot to lenders to participate, instead of just abrogating their rights. And everybody would be on board with banks getting more carrots from the government, right?

I don't think you've thought this one through. If there are no foreclosures allowed, what's to stop the borrower from simply deciding that making mortgage payments is a silly waste of money??? Can't toss them out for not paying, so what can you do if they stop sending in the check?

I think that the fix for many is to simply restructure some of those ridiculous ARMs and interest-only mortgages to fixed rate. If you need to get the monthly payment below a certain point, then extend the loan out to 35 or 40 years. Structure the federal loan programs to pick up more of the backend risk on the extra 5-10 years.

That won't help people who are underwater and are forced to sell due to age/health or because of geographic reloaction needs, but it will help the people with balloon mortgages that simply need to get the monthly payment back within their means to pay. That would cover a large percentage of the primary homeowners.

As for the speculators walking away from their underwater investments ... their problems are not something I lose sleep over. I understand the risk/reward trade off. Foreclose on them, there's no other sensible option. Sadly,there are paying tenants in many of these properties. Banks need to consider retaining a property management firm to run such foreclosures with the tenants left in place.

Please block all foreclosures. Just give me a couple of months advance warning so I can stop paying my mortgage and no one will throw me out of the house. Imagine! Yippee!

Thanks, Steve. But let me ask a question: Do you guys actually think that the threat of foreclosure is the only reason why people pay off their mortgages? Don't banks and financial institutions have any other recourse? I think they do. And I think most people will meet their obligations -- that is, if they ever want to get another loan in this lifetime. I think as a nation we have to stop kicking people out of their homes, and people have to stop viewing housing as a cool investment they can milk in an ever-overheating market. Borrowers and lenders collude to jack the system. And in the end it's little people who suffer.

You pretty much have no idea what you're talking about. Prices need to come down, period. People can't afford these houses, and they need to get out of them, and prices need to come down. Of course, realtors, brokers, banks, etc all love high prices, which is why there's little interest in letting that happen.

Shawn:

I can't comment on how things work in California, because I've ever been able to understand anything out there and haves ceased trying to pretend.

I have a cousin out there who also complains about how the banks have set your housing prices so high that people can't afford homes. She'd really like a beach house, and her blonde self deserves one.

In the rest of the country, however, banks and brokers and realators dont set housing prices. Prices are set by what a buyer is willing to pay and what a seller is willing to accept. We call this the free market.

Perhaps you should consider relocating to another part of the country. I'm trying to get my cousin to move too, but she doesn't want to give up her California citizenship.

A currency will do well versus the dollar for two reasons:
(1) The American economy is not doing well, so the dollar weakens. This is true at the moment.
(2) The foreign economy is doing well, so the foreign currency strengthens.

All non-dollar currencies share the first reason to some extent, so focus on the second reason. Look for currencies of countries that have low government debt, growing economies, younger population, stable politics, well-run or reforming legal systems and robust capital markets. China, Korea and India exhibit these signs. Countries that produce commodities like oil, copper etc. are also attractive as the world comes out of recession. Australia, Canada and Brazil are examples.

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Bing,

You should have addressed the elephant in the room here... contract law. One of the reasons that no one wants sweeping legislation to "end foreclosure" is because doing so would involve the mass modification of the literally millions of contracts out there (esp since most mortgages arent owned by the banks but by investors of every shape, size, risk level, and nationality). Servicers have a legal (and in my opinion moral) obligation to protect these investors... not homeowners. Finally in order to stop the "walking away from affordable upside-down mortgages", youd have the federalize recourse provisions that are currently in the hands of the states (CA = non-recourse)... I actually agree with you, that all loans should be recourse loans where the debt is yours no matter what... That said, youd probably see an increase in bankruptcies if an all loan recourse policy were enacted.

"A little legislation" ... we already have way too many laws, lawyers, and politicians.

No bonuses for any financial executives (including Goldman and JPMorgan) until we get ALL of our bailout money back, not just TARP. And, stop raising interest rates as HARM loans reset. We still have 3 - 5 more years of these to go through. Those people need to get real.

We're also going through price discovery right now to try to find the true real estate price levels after a massive bubble. Hint: we're not there yet. Buy-and-bail, foreclosure, and repossession are negotiating tools along the way to be used by borrowers vs. lenders who don't want to negotiate. Personally, I think we should be doing a lot more short-sales to quickly get people out from under debt and get the economy back on its feet. The billionaire banksters can easily handle these losses, but the poor borrowers can't, so the loan loss limitations in place since the '30s need to stay. We can do this today with no new laws.

The banks should sell the repossessed properties gradually for what they're really worth, not hold them for what they think they're worth.

How can one put a price on your "home"? If Chase would have helped with an affordable permanent modification after their trial modification,I would still be in my "home"!!! Yes the value of my house is less than I owe, but I would still be in my "home"! I would be glad to pay the amount I owe, if they just could have made the monthly payment affordable!!

Well said, legislate this! I have another one make the new social security medical handout ping on the insured owing the money back to the federal Government in the form of life insurance that way the Government is sure to collect and can lend a helping hand now. Start with new borns and the elderly!!

Would have been easier to just tell banks who got bail out money that they were lowering the rates of ALL mortgages to 2%. The banks still make 2%, this helps peopel in ARM, less paperwork, and for those who have no problem meeting monthly payments it gives them more money to spend into the economy. Oh I am sorry this was so simple that everyoen would win out, cant do that.

ARMs were a bad idea (for society) from the beginning. An ARM, any ARM, by definition, is nothing more or less than predatory lending.

Our representatives (and administrations) failed us completely over the course of years as they stood by and did nothing about this growing cancer on our real-estate market.

Yes, they should fix it now, after the fact, not by abrogating the existing contracts, but by offering (legislating) direct fixed-rate replacement loans for anyone who wants one for their principal residence.

Whether it's a direct gov't loan, or a mandatory bank loan is a secondary consideration. Old ARMs should be replaceable by a new fixed-rate loan that allows those who are willing to pay off their inflated purchases to do so. This would a) help to minimize the "downward overshoot" of the needed price correction b) send the message that long-term lock-ins of predatory practices cannot stand c) (incidentally, ha!) allow huge numbers of people to remain in their homes rather than be forced into the street.

Using taxpayer money to bail out the banks changes the equation. For all of you concerned about upsurping contract law with dictating new mortgage terms to banks, no need to be concerned. It is also a well established principle of contract law that you can not contract something different than what the law says. The law needs to be changed to force modifications on these mortgages. As for the investors in these CMO's, they need to take their loss. Whenever you get a bigger return on investment, you increase your risk of loss. Contact your represtatives and senators to get Bing's solution implemented ASAP for the good of the country!!!

I am amazed that more is not said about personal responsibility. There are many foreclosures that the home owner no matter what reasonable payment schedule can be worked can not repay the loans. Unfortunately through both bank irresponsibility and personal irresponsibility these loans were ever made. Do I think we as a country, industry or on a personal level have learned our lessson, no.

I agree with Bill. What about personal responsibility? The bank didn’t twist a persons arm to take out an arm loan. Granted it is a stupid loan except for maybe an investor but still the borrower did sign the note. As much as most people don’t want to believe this it is explained how an arm loan works when an LO pitches it. If you want to feel sorry for someone feel sorry the people that lost their jobs not for the dope that signed an arm loan then doesn’t want to pay for it. As for the idea of letting people sit in their house for free.... such a bad Idea. I work in the industry, most foreclosed houses are all tore up and very neglected. I’m not talking about neglect because they could not pay for a repair. I’m talking about neglect as the house is full of trash with holes in the walls and such. If the states, federal government, and local level government would butt out and let the banks foreclose we could get this all behind us. We are all adults. Let’s start acting like it and quit blaming the MAN or the bank for that matter for being stupid. When you sign the dotted line on the contract you made yourself the person to be held accountable. As for Tarp, I agree, if you are apart of it like BOA and such. You bet cut bonuses, they don’t deserve the money and the gov is part owner and should have a say so in what the CEO gets paid. As for the banks that paid it back, Lay off of them, they paid back their loan from the Government. Part of them didn’t want the money anyway but was forced to take it. Slippery slope we are causing with the government telling a company what they can pay. I will tell you. I would not be a very happy individual if the gov said that I made to much money. I bet most other people would to. And seriously people if your employer offered you as much money and bonus as the top people made would you not jump on it or would you sit there and say .. Oh no that’s too much money can you reduce my pay.

A simple answer to immediately stabilize the market should be implemented. Offer EVERYONE who currently owns real estate a loan of up to $500,000 per property at 5% with a 40 year term. Loans on properties where the person owes over 500,000 would get a loan at 5.5%, also for a 40 year term. Offer this on ALL real estate, both primary residence, 2nd residence, and investment property across the board. Give everyone an automatic modification on these terms. Then everyone would be out of bad mortgages, and the original cause of all this mess would finally be addressed.

get real. If you create harsh conditions after the fact, you run into our Constitutional ban on ex-post facto laws. [you can't criminalize behavior after it is done.]

If you do so before the fact, why would any bank ever make a home loan to anyone without a 50% cash downpayment and/or a commitment from FNMA/GNMA to buy the loan from them at a profit.

Reminds me of the great and misleading Boston housing discrimination study by the Boston Fed of the 1990s. Upon further investigation and after it was used to politicially juice up the CRA, it was found that all the "discrimination" was due to the much tighter loan policies [which were applied without discrimination] of a single bank that primarily did business in poor neighborhoods. [The bank was minority owned, too. They KNEW their customers.]

Anger is not useful in designing a system, whether you're engineering electronics or banking.

Bing -

Instead of "stupid banks made stupid deals with hopeful people", don't you think that it might be more accurate to say "stupid banks made stupid deals with stupid people"? And what about greedy people like the guy and his wife that I met in Reno, NV who were flipping houses with credit cards? I guess that if there is a corportate entity involved, the "little guy" is no longer responsible for his own behavior . . . you might find that there are at least 2 or 3 Gordon Gekkos living on every block in America, if you were willing to look . . . .

A task force formed by the Florida Supreme Court in 12 weeks came to the conclusion homesteaded properties will need to be mediatiated before a foreclosure goes completely through to final judgement. I can't wait to vote out Congress and "Yes we can". No results from washington. If your in trouble, look out for yourself, thats for sure.

AS FOR PERSONAL RESPONSIBILITY!!! IF THEY WOULD NOT HAVE TRIED TO TRICK ME AND WERE UPFRONT ON WHAT THEY WERE DOING, I n e v e r WOULD HAVE SIGNED PAPERS TO BUY A HOUSE. i WOULD HAVE BEEN HAPPY RIGHT WHERE I WAS AT. AND I'D STILL BE HAPPY INSTEAD OF MISSERABLE! a HOME IS WHERE YOU PLACE YOUR HAT...NOT A HOUSE. THEY COULD HAVE HAD THEIR HOUSE AND I'D HAVE MY HOME! THEY KNEW WHAT THEY WERE DOING. UNFORTUNATELY I DID NOT!!!!

I'm interested in your story, Mr. or Ms. Hall of MN. Please tell me more.

The reason the banks made the loans to many was the bank was betting agianst the loan in the credit default swap market. This is the real reason this crisis occurred. The banks got paid to lie on the paperwork, then bet the bonds would fail and now want the house back. Nice guys.

Foreclosures are still better way to make profit.There are lot of people who are earning through it.

The Fed has bailed out Banks and is making money available to these Banks at very very low interest rates.
Americans who are jobless or who have had their incomes reduced in these HARD TIMES and owe the IRS are being charged a rate 3 times more than what the banks are being charged. How about lowering the rate for those Americans also Mr. President?

posted by Bob, Silver Spring, MD.

Nice try, but ...
- No more tax breaks
- No more taxpayer bailouts
- Get ALL of our money back from Goldman

The above apply to both borrowers and lenders. In addition, borrowers must be allowed to walk away if lenders will not renegotiate. And, lenders must be allowed to foreclose if borrowers will not pay up. If these don't work, there's bankruptcy, which may be the right solution in many situations.

The real estate market is now in price discovery, trying to find out what all of these properties are really worth vs. price fiction, what we have now. Prices that are more than 3x - 4x income are not realistic (US median income is $40k per year). People will start buying again when prices return down to normal.

Oh, and keep the politicians and lawyers out of this; they've made a big enough mess already. The market is starting to function again, now that prices are getting back down to earth. Let it work itself out.

To Dave in Toronto: I have homes in Toronto and the USA. However it is regarding health care that I would like to comment. When I had cause to call the poison control center in Ottawa last week, I received a "we're closed" message. I was shunted to another number with an automated message promising to get me to the next available person -- a false promise as it turned out. I called the poison control center in the USA and was aided by the person who immediately answered -- no transferring me to a "next available". The US center then followed up with me the next day and provided assistance and advice. I commend the US center for their thorough professionalism; I don't know what to say about the Canadians -- I never got through to anyone.

C Hall, why don't you take responsibility for your own part in the loss of your house. It's not the banker's job to educate you on the deal you're about to sign....it's your job to educate yourself. Yes, maybe you were a victim of predatory lending. If you are, I hope you're cooperating in the prosectution of those responsible.

I personally can't imagine no foreclosures for a long long time...

http://www.thepanicnews.com/2009/09/19/home-prices-will-continue-to-coll...

For anyone looking for help that has been or is close to foreclosure, please visit www.fvoa.net This is a non profit that is accepting donations and taking grant applications for those affected by the "mortgage meltdown" here in America. Please visit today to help.

marvelous!

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