Ways to cut down on foreclosures
TEXT OF COMMENTARY
Kai Ryssdal: Here’s a new idea from the Obama administration. Instead of working overtime to figure out ways to keep homeowners who’re in financial trouble in their homes, the White House wants to pay some of them to leave. The New York Times reports today the Obama administration’s going to start encouraging short sales, in which the bank takes less for a house than is left due on the mortgage. It’ll sweeten the pot by offering both lenders and homeowners token remuneration to move the deal along. The plan could, if it works right, could help cut down on foreclosures.
Commentator David Abromowitz offers some other ideas.
David Abromowitz: It’s 2010, and foreclosures have gone viral. One in seven American families have fallen behind on their mortgage payments. Many others keep paying, but owe more than their homes are worth. And studies show that more than five million of these families are hitting a dangerous “walk away” point — where it makes more economic sense to just hand over the keys.
Despite government incentives, lenders have done little to give homeowners a reason to hang in there. True, recent Obama administration help for hard hit states is better targeted, but it only goes so far.
Congress can’t just hope this foreclosure fever will break on its own. We need concrete solutions before our economy gets too sick to recover.
Here’s three ideas to consider…
One — mandatory mediation. This has worked well in Philadelphia and Connecticut. Mediation between borrower and lender prior to a foreclosure unclogs courts, and achieves faster, cheaper, and better resolutions for all involved.
Two — a national foreclosure moratorium. During the Depression, many states temporarily stopped foreclosures. This gave struggling families time to work out a payment plan, or maybe even find a job. A national measure today could motivate lenders to offer more aggressive loan modifications.
And three — eliminate the special tax break for mortgage investors. This one is complicated, but potentially the most effective. You see, mortgages are actually owned in big pools, called Real Estate Mortgage Investment Conduits — REMICs.
Investors in REMICs enjoy valuable tax benefits. These tax breaks were intended to encourage private capital to fund home ownership. Yet with shares in REMICs sliced up among so many investors, it’s practically impossible to get them to agree on slowing down foreclosures. If instead we eliminate the tax break when a REMIC just keeps foreclosing, they will change course quickly to modify loans whenever possible.
All these remedies create consequences for lenders who keep needlessly foreclosing, giving them an incentive to negotiate first. And none of them require more public spending. That’s got to be better than staying the course.
RYSSDAL: David Abromowitz is a senior fellow at the Center for American Progress.
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