Bailouts and “homeowner relief” only prolong the market agony!?

I know it may not be PC (in most REALTOR® circles, at least), but this editorial from today’s (March 12) Wall Street Journal makes good sense to me. The gist of it is that helping homebuyers stave off foreclosure (for an additional month or so…) and programs that attempt to keep marginal borrowers in their homes at any cost is actually prolonging the agony. The author argues that the market won’t reach bottom and start back up until the bad credit risks (or at least the worst of them) are out of the homes and bad loans. In particular, he writes:

….Government policy is working against itself. The Fed is pushing on a string — it can’t bring back confidence in specific assets by flooding the market with generalized liquidity, though it can certainly undermine confidence in the dollar and its own anti-inflation credibility. On all sides, meanwhile, the call for a housing bailout is becoming deafening, nigh irresistible. But the seized-up credit markets won’t be unseized by trying to induce debtors to cling to houses they now see as throwing good money after bad.

By definition, the only haircut lenders rationally want to take is the minimum required to keep owners on the fence about walking away. Not much better are bailout plans that try to keep borrowers in their homes by shifting some of their equity losses to the taxpayer. The market has utterly changed from the market in which these recent purchasers made their purchase decisions. They’ve been renting their homes and don’t really lose much through foreclosure. Let them go.

What do you think?

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7 Responses to Bailouts and “homeowner relief” only prolong the market agony!?

  1. Brian Block says:

    Scott, after reading just the headline, the first thought that came to my mind was “Good money chasing bad.” So, it was no surprise to read that halfway through the post. While it’s an unfortunate reality in today’s market, and nobody wants to see somebody lose their home, keeping them there and covering their wounds with bandaids will do no good in the long run.

    There’s lots of different reasons for foreclosures. Medical issues and bills, divorce, bad lending practices, and in some cases, just plain stupidity. While it’s easier to feel sorry for some cases than others, in no case should we (the taxpayers) be burdened with other people’s financial problems.

    Instead of a government bailout, what about a private sector foreclosure insurance industry? Or will that just end up as another nightmare a la health care insurance?

  2. Jim Duncan says:

    “”Giving money to institutions that failed at their only job, which was to have money, may not be the best strategy.” ”

    Source.

  3. Tony Arko says:

    The problem is if we allow everyone who wants to just walk away and foreclose and we allow them to do that at essentially the same time, our entire banking system will lock up due to illiquidity. This is caused by the fact that every single balance sheet for these banks and financial institutions have assets on their books that are worth singificantly less than the banks have them valued for. And if they foreclose on them all at the same time instead of drag them out over several years, they will not have enough capital to continue operating under our current banking regulations. Then the banks freeze all their assets, including the accounts of the people who are paying their mortgages. Then it becomes panic and the whole thinkg collapses. I say let them drag it out. The amount of leverages assets that needs to be unwound is just too much for our system to handle.

  4. Lem Marshall says:

    [Blogmaster’s note: Lem Marshall is special counsel for the Virginia Association of REALTORS]

    In fact, lenders understand the need for orderly disposition of problem loans and the properties that secure them. The short sale is an important part of the solution here. If we think of the short sale as a proxy for foreclosure and/or sale of REO, we can see why the short sale is an essential ingredient in the lender’s long-term workout strategy. It allows the lender to clear the bad loan from its books without the incredible expense of foreclosure and owning the property ($60,000 on average as of 2003, almost certainly more today). Short sales speed the return of problem collateral to the market and hasten the day when we will see the bottom in home prices, something that is essential for the restoration of lender confidence in making future loans. Until that bottom is reached, neither lenders nor buyers/borrowers will be convinced that the home won’t be worth less in a year or even two, and they won’t return to the markets.

    Requiring lenders to approve listings is purely fanciful. No lender is going to get caught up in such a practice, as it is a fool’s game, not the least of the reasons for which being that the lender would (likely) be commiting to a deal at a price without knowing the market for the asset. An orderly marketing effort is the lender’s best assurance of the market, and I would be amazed if lenders would agree, in advance of such effort, to a price for a property.

    Furthermore, our MLS cannot require listing agents even to disclose that there is a likely short sale. Why not? Virginia law prohibits listing agents from breaching the confidence of sellers as to any personal or financial information of seller unless the law requires it, and no law requires listing agents to give the world notice that the seller is in distress before even testing the market. Lenders won’t participate, and seller’s can’t be forced to, so the MLS will be quite powerless to force an end to the current turmoil by the means suggested.

    Buyer agents have ample means at their disposal to protect their buyers from being caught up in the short sale maw, if they will only use them. But the short sale is an essential ingredient in the race to the bottom of this slide, something we should encourage, rather than work to halt. (There are many other (better) ways to protect lenders from liquidity problems, and the Fed is exploring them now.)

  5. Jay Thompson says:

    “. . . the incredible expense of foreclosure and owning the property ($60,000 on average as of 2003)”

    I’ve heard that number several times recently. Wondering if anyone has a link to the source?

  6. This is my thought also the same people we are helping will have the same trouble again. I can only think they are not doing it for the families but for the lending industry assistance and big business. We need to let this process just run a muck for a better word. The market always recovers and we need the homes to devalue for them to revalue. The problem is the process is on a mega scale due to bad lending practices and it’s hard to not step in.

    Homeownership is an investment long term and should be something that you have the means to pay for.

    I would have rather seen the goverment come up with jobs than a hand out to lenders. When people have good jobs they inturn can afford to buy houses.

    We should do everything to stop overseas jobs and bring the jobs back to US. I saw a blog where boeing may ship part of it’s work overseas this means 44,000 jobs going overseas and not staying her in US in Alabama. It jobs like these that need to stay.

    I look to a new presidential administration to help restore the American Dream. To stop the war to bring them home and put them to work rebuidling infastructure and securing our borders and creating business the are “green” and building “green” and getting away from the need for oil and wars.

  7. Lem Marshall says:

    Jay:

    The study was by the Tower Group in the 2002-2003 time period (if memory serves). I checked their website, but couldn’t find a copy of the research, but you might have better luck.

    Lem

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