Arnold Kling  

Preventing Foreclosures

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I have written,


As difficult and painful it may seem in the short run, it probably would be better to work through the foreclosure process and let prices adjust to levels that bring supply and demand into balance in the housing market than to prolong the state of imbalance and uncertainty by trying to prevent foreclosures.

October 6, 2008

What we need is an honest housing market, with legitimate owners, legitimate renters and prices that balance supply and demand. Loan modifications undermine the honesty of the market. They delay the necessary adjustments. With foreclosures, it might take two years for the housing market to find a bottom. With loan mods, it will take at least ten years.

That is from December 10, 2008

If policy makers had done nothing about the foreclosure crisis, it would be mostly behind us. Instead, it is mostly in front of us.

That is from November 30, 2009.

Concerning the latest attempt to intervene to prevent foreclosures, what more can I possibly add?


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COMMENTS (5 to date)
Tyler Link writes:

I bet it is of no comfort being consistently right, and consistently ignored while the consistently wrong are consistently given more power to do what they consistently believe is right.

Mercer writes:

I think you could add that trying to keep unemployed people from defaulting is futile. Money would be better spent on homeless shelters.

I don't think the government has done much for under water homeowners. It has given lavish aid to banks which has enabled them to not recognize their losses.

Arthur_500 writes:

I have long said we need to bite the bullet and get to the end of this mess. So far we have wasted time and money and we are still in the same place.

Economics is no place for emotions. If we lose our jobs, that sucks. However, that is no different than getting hit by a bus or a meteor. Either way, our life takes a dramatic change and not necessarily for the best. Even a coin flip turns up tails half the time. Why is it that we should always have a gravy life?

That said it is imcumbent upon business managers to do what is best for their company. If they are going to lose $100,000 on a foreclosure then it makes sense to forgive some principal in return for the consistent stream of payments. They might cut their losses to only $50,000 and that is in the best interest of the financial institution.

So why hasn't this been done? Moral Hazard? Bankers that can't see the forest for the trees?

If this is really a good idea then I think bankers are living in a class cacoon and can't see. If it isn't a good idea then I can't see why bankers don't get on with the task at hand.

Do the math.

Doc Merlin writes:

If it is known that your forgive part of principle without liquidation principle, people will default to get partial forgiveness.

What many don't realize is the the system we have of debt forgiveness arose out of centuries of struggling with these issues. Economic historians are needed for this, because people simply don't know and understand that all these measures have been tried in the past and have failed horribly. Sigh... we never learn from history.

Dyer1829 writes:

The problem I see with foreclosures is that banks do not want to cut their profits. They will always want the full return of their investments. If a bank has the choice of foreclosing on someone and giving them a break in their payments and say losing 15% of their investments, they will foreclose. The problem with this is that in the current market, you are not likely to find someone else to move into that house and finish paying off the loan. In the current market, a foreclosure could sit for a long time, depending on the location, and even in some instances, never sell. I am sure that banks have seen this trend and someone has proposed this idea. So why isn't it happening? Because the higher ups in the banks do not want to lose their investments. This isn't because they are mean or evil, but simply because they want to maximize the output of their company, and if it worked, it would be better for all the employees of that company. If we were in a better housing market, this theory would work wonders, but that is not the case, and until banks realize this, they will keep giving out these bad loans and winding up with foreclosures.

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