State help for troubled homeowners

Marketplace Staff Aug 3, 2007
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State help for troubled homeowners

Marketplace Staff Aug 3, 2007
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TESS VIGELAND: The first six months of this year saw a 58 percent jump in the rate of home foreclosures. More than 573,000 homes went into default, were repoed or hit the auction block — that’s according to RealtyTrac. The company’s CEO predicts that number could soar past 2 million by the end of the year.

Several states are setting aside money to help homeowners refinance out of mortgages they can’t afford. Chris Mayer joins us with details. He teaches real estate at Columbia Business School Chris, who do these programs target?

MAYER: The people who would benefit most and who are really facing the biggest problems are people whose credit is not very good. I think for people who have good credit — particularly for people who are in houses where the mortgage amount is under $417,000 — there really is not going to be a big problem refinancing their credit. And in fact, I think mortgage rates are more or less still very closely tied to the interest rates in the economy, which have been rising, but are still at reasonable levels.

VIGELAND: Is this a good thing for states to be doing — bailing out homeowners who got into bad mortgages? I mean, couldn’t this potentially put a strain on these states’ financial systems?

MAYER: I understand what politicians are trying to do, which is it’s really hard to sit back and watch these problems developing. But I also think there’s not much they can do. And I think that they’re using up fiscal capacity for states in programs that are really just going to be a drop in the bucket. You know, we’re talking about 500 or 1,000 homeowners, and that’s just too small to make much of a difference.

VIGELAND: What would be a better way to help all these folks who are facing foreclosure or short sales or, you know, essentially losing their homes because they got into bad mortgages?

MAYER: I don’t think there’s much that the states can do or local governments can do to prevent people from losing their homes if they took out mortgages that they now can’t afford. I think what states have an obligation to do is to try as much as possible to make sure that there aren’t spillover effects, where you have neighborhoods that have a lot of boarded-up homes, overgrown grass, crime, those kinds of things. And I think the states would be much better off taking these resources to make sure that there aren’t ancillary effects that bring down the value of houses for people who haven’t gotten into financial trouble yet — that is, to stop this from becoming a contagion as much as they can.

VIGELAND: How do they go about doing that?

MAYER: Well, I think one of the things that states and local governments should do is really try and allow the market to work as quickly as possible — that is to say, to make sure that as properties are being foreclosed, that that happens in an orderly and a fair process. But the less time those foreclosed properties are owned by banks, the better, because you really want those properties in the hands of people who are gonna live and maintain them. There’s gonna be increasing political pressure for states to do things to stop people from foreclosing, and I think that would be a really big mistake. That will cut off the supply of new credit into those markets and, you know, it’s going to be true — there are gonna be people who are really going to be hurt by this. And the temptation is for those people, when they make the headlines of the newspapers, to do something for them. But I think the time to have done something was two years ago, it’s not now.

VIGELAND: Chris Mayer is director of the Milstein Center for Real Estate at Columbia Business School. Thanks so much for coming in.

MAYER: Thanks a lot, Tess.

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