Arnold Kling  

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Bloodlands... The Supremacy Clause...

Business Week reports,


Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works."

It's her last sentence that is frightening. My view is that the longer the government attempts modification plans, the longer the crisis will last.

The article begins by discussing the documentation problems with foreclosures. It introduces us to a not-so-angelic mortgage defaulter who has successfully avoided foreclosure for eight years. Read the whole thing.


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COMMENTS (10 to date)
Floccina writes:

On NPR they interviewed a woman who though she had only paid $70,000 for her home owed $300,000 on it. When asked about it she implied that she would do it again rather than that money in the house. How can the Government justify helping her with money taxed from the prudent? She did what she did with her eyes open. Better a FICA holiday helps the marginal but lets the worst offender fail.

Ano writes:
My view is that the longer the government attempts modification plans, the longer the crisis will last.

If the government stops the modification plans, house prices will fall, lots more people will declare bankruptcy, and the holders of the defaulted mortgages will lose lots of money.

In an economy where everyone is trying to deleverage, and inflation is very low and falling, and where both monetary and fiscal policy are all but off the table, won't this make things worse? Won't this make the crisis last longer?

kurt writes:

How can someone avoid bankruptcy when he has to pay all these SEC fines? Is some federal prosecutor asleep in Florida?

John Fast writes:

Just remember what Lenin said: for starting a revolution, worse is better!

The worse the economy is, the more incumbent legislators will be unemployed after November 2.

Since politicians are the ones who caused the problems, those politicians are the ones who deserve to suffer.

(I'm registered to vote in Florida, where Alan Grayson and Ron Klein in particular are looking increasingly desperate, nasty, and pathetic.)

Hyena writes:

I thought the various attempts to keep people in their homes had proven entirely unsuccessful. So far it is the local issue of producing promissory notes where the government has had most impact and not by design, either.

What kept most people in their homes most of this time was the inability of firms to hire enough people to actually do the foreclosing.

Charlie O writes:

When I read these articles I wonder how many people have been foreclosed upon in error. There don't seem to be many such examples in articles which leads me to believe not many people have been foreclosed upon in error. Is there any data on this?

q writes:

govt programs to forestall foreclosure are pretty much done.

what i don't understand is why the large holders of non-paying mortgages -- the BACs and WFCs for example -- would want large scale foreclosures. seems like they would want a measured slow pace of foreclosures. they care a lot about their portfolio value and wouldn't want its value to decrease much.

Shayne Cook writes:

There is another very scary passage in the article:

"There is a whole lot of regulatory forbearance going on."

Well I should say so - evidently since about 1999.

I would take some exception to Dr. Kling's description of Lents as the "not so angelic mortgage defaulter ...". I consider Lents something of a hero. Granted, he (and others like him) are allowed to enjoy the benefits of the intrinsic value of their homes while this mess gets resolved.

But there is a wrinkle I've not heard many discuss: To a "homeowner", a home has both intrinsic value and a potential investment value. Lents (and others like him) may be currently enjoying the benefits of the intrinsic value[s], but they'll never enjoy any of the current or potential investment value[s]. Lents has avoided foreclosure for eight years due to the fact that no entity has been able to "prove" it holds his mortgage and thereby has rights to payments or foreclosure. Lents can't prove he owns it either, which effectively precludes him selling it and realizing any investment gain.

I'm with Dr. Kling and others in asserting that defaulters are violating their contract obligations and deserve no benefit for having done so, under the law. I don't consider Lents a hero for defaulting. I consider him a hero for insisting the law be adhered to.

Maybe "regulatory forbearance" - non-adherence to the law - that has been such central contributing factor to this mess, from the beginnings of the housing bubble, isn't providing a societal benefit. It does seem to be providing a great deal of societal cost - with no end to those costs anywhere on the horizon.

Simon K writes:

We've got to get past this, get everyone to acknowledge their losses and move on. In some places house prices will probably come back, but in the less desirable bits of the bubble areas in the West and Florida there's no way they'll come back and it has to be dealt with or the sheer dead weight on the economy will be with us for decades. That means both the banks and the homeowners.

Loan modification could be a solution if it meant writing the principal down to the true value of the collateral. The banks may hate this idea because its liable to make them look insolvent, but its just an acknowledgement of the true value they'd get in a foreclosure sale without having to pay the costs of that. Unfortunately it seems like loan modification often really means reducing payments to manageable levels - that's not a solution for anyone.


Shayne Cook writes:

Another "wrinkle" ...

I wonder how robust "squatter's rights" laws are in Florida and other states. It could be that is an answer to the question "q" posed, above.

And it could be a path for Lents to in fact realize investment gains.

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