It’s only taken six years to learn, but the lesson may finally be sinking in: Public policy designed to keep bad borrowers in homes they don’t want to pay for has been a disaster.
The takeaway here is something Reason readers have been aware of for years but that the establishment media have only recently begun to consider: The real scandal is that lenders are too slow to wrap up foreclosures. And by encouraging lenders to drag out the process, the Obama Administration has taken bad borrowers on a long and costlytrip in a circle, instead of letting them go back into the rental market and get on with their lives. The bottom line comes from a West Palm Beach real estate agent named Frank Verna:
“The truth of the matter is we would have already gotten over it if they just let the properties get out there and get sold,” Verna says. “So what are you doing? You’re not stabilizing the market. You’re creating more chaos.”
Politicians had the best of intentions, but if someone couldn’t lost their job cutting their mortgage 5% wasn’t going to help them. If the market changed and the house was suddenly 20% or 40% underwater cutting their mortgage slightly wasn’t going to change that. If someone wasn’t paying their mortgage reducing the mortgage wasn’t going to keep them out of foreclosure.
One suspects that a large part of the motivation wasn’t to help mortgage holders, but to help banks. If they can avoid foreclosing they can avoid declaring losses. If someone isn’t making payments their losses on paper are small. If they foreclose the losses on paper suddenly become massive and it begins threatening the bank’s solvency.