New Year’s Resolution: Solve the Foreclosure Crisis

Posted on December 14, 2010. Filed under: Uncategorized |

We hate to be Grinch-like in casting cold water on signs that a fragile recovery may be taking hold, but there’s an elephant in the room that must not be ignored.

The foreclosure crisis, remember that? When the new Congress convenes in January, it will face a serious threat to the health of the financial system in the form of a scandal over mortgage companies’ flawed documents, including the use of so-called robo-signers to sign loan papers without human review.

This should come as no surprise to lawmakers. The Congressional Oversight Panel, which was charged with overseeing the $700 billion federal bank bailout, told them as much in a report issued last month. The report’s language was harsh, warning of “much deeper problems in the mortgage market that could potentially threaten financial stability.”

At the very least, the panel said, the Treasury Department and bank regulators should do new research to determine if banks can handle the impact of taking back billions of dollars in foreclosed loans. But much more is needed and some, at least, are taking the threat seriously.

The Treasury Department says the loan put-backs caused by flawed paper will carry a price tag of at least $56 billion to $64 billion, a figure the lenders acknowledge and are prepared to absorb. But the total could be much, much higher.

Investigations are underway by the Senate Banking Committee, federal authorities and the attorneys general in every state. Mortgage lenders have pledged to fix the system and several major lenders, including Bank of America Corp. and J.P. Morgan Chase & Co. are seeking to determine the depth of problem.

Former Sen. Ted Kaufman, the oversight panel’s chairman, held out some hope that the problem might not be as bad as it seems. “It could turn out to be nothing, but it could turn out to be a big deal,” he said.

Still, with the economy lurching toward recovery, this is no time to be taking any chances. Congress, bank regulators and the mortgage industry ignore the potential impacts of the flawed paperwork at the nation’s peril.

Sen. Christopher Dodd (D., Conn.), the outgoing head of the Senate Banking Committee, has called for the establishment of an independent board to dig beneath the topsoil.

And Sen. Richard Shelby (R., Ala.), the panel’s ranking Republican, says federally controlled mortgage companies Fannie Mae and Freddie Mac also should be included in the investigation.

While we hope Kaufman is correct when he suggests the problem may not be as widespread as it appears, the possibility of damage to the recovery is too great to leave to chance. We’re hoping Congress, the feds and the industry include getting to the bottom of this crisis on their lists of 2011 New Year’s resolutions.

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3 Responses to “New Year’s Resolution: Solve the Foreclosure Crisis”

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A Workforce Housing Program which has been around for more than 30 years and actively utilized in the ski resorts and many major cities could simply be applied to resolve the foreclosure crisis.

The plan would be to offer an opportunity to all homeowners to participate in launching a National Workforce Housing Program by placing a “Deed Restriction” on their home (must live in the home, own no other home and work for a living) with a 3% yearly cap rate for sale purposes. The home would be reappraised at the new value (30% to 50% less than a similar free-market home). The mortgage would be rewritten and payments adjusted to the new appraised value.

It would not be a “give-away” or a “bail-out” since the participants would buy-in to the program by forfeiting the “free-market” appreciation value of their home and by also participating in launching a National Workforce Housing Program, which is much needed, plus there would be no negative stigma on participants since they paid to participate.

The home would remain affordable to workforce people and families forever due to the restricted appreciation and sale price (3% compounded yearly).

It would not encourage homeowners who own a home they can afford to jump in on a “give-away” or “bail-out” they don’t need, but would reward them by solving the foreclosure problem in their neighborhoods and cities and allowing their home to start appreciating again and allow the economy to repair it self.

The Plan could also be offered to bank owned and developer owned homes, which would also help the housing industry by doing away with the over-supply of homes for sale in our country which is a major problem.

It would also create and opportunity for renters and 1st time homebuyers to purchase a home at an affordable price which is also much needed and deserved.

This is a once in a life-time opportunity to create a national workforce housing program at a fraction of the cost of a piece-meal price while solving the foreclosure crisis and the homes would be scattered throughout communities instead of concentrated in projects.

It is a solution to the foreclosure crisis and one that we already understand, and know how to run and implement not one we made up for the crisis.

Families would be able to keep their homes and homes would once again become a home like in the not so long ago times of our grandparents who burned the mortgage as soon as they could and never borrowed against their home again. Scott Brown

The mortgage paperwork brouhaha is a red herring designed to facilitate what Washington does best: kick the can down the road.

Negative home equity is a fact that can not be wished away. Time and price discovery alone will solve the problem.

House prices need to fall another 20% or so to simply get back to the long term trend line. Remember it is called the LAW of supply and demand, not the SUGGESTION of supply and demand.

Scott: You offer an interesting proposal that is worthy of consideration. It is, obviously, a long term plan that will require a rethinking of some morgage basics as well as ample political courage. Not sure Washington is ready for it now. What we do need now is the attention of Congress and the administration to a problem that is not going away. Thanks for the comment.

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