The case for mortgage rewrites
Yglesias on what happens with mass foreclosures:
So the homeowners lose their homes, which is bad for them. And the banks, rather than being able to recoup the losses by taking over the properties, are left with a bunch of worthless houses, which is bad for them. And then this situation adversely affects the value of everyone else’s house in the area. And many of the foreclosed houses wind up left standing vacant, which is bad for the whole neighborhood in a whole bunch of other ways.
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Since we know the end state will involve more-or-less the same set of people living, in the aggregate, in more-or-less the same set of houses and making, in the aggregate, lower monthly mortgage payments we ought to be able to short-circuit some of the dislocation. Have people stay in the houses they’re in right now. Adjust their monthly payments down to something they can afford, but that constitutes a better deal from the bank than what they’d be able to get by auctioning the property.
Might seem simplistic, but it’s a strong argument. Unfortunately, it’ll never happen. We’ll give $700 billion to the big banks for their mortgage junk, but won’t spare a dime for homeowners, even though, in the long run, it would actually help the homeowners, banks and the broader economy to do so.
September 25th, 2008 at 11:18 am
Ultimately it is the home owners fault, they are the one who took on loans they couldn’t afford. Sure, the banks had their part in it, but blaming anyone but the borrower, is like blaming the teacher for the five percent of the kids who failed their class.
September 26th, 2008 at 7:31 pm
The point of both the bailout and Yglesias’ post isn’t about “fault.” It’s about what we do to save our financial system now that we’re in this mess. And there’s a compelling case to be made for renegotiating loans with homeowners, in order to save communities and provide the lenders with significantly more money than they’d get with a foreclosure.