Foreclosures

One thing about economics is that when an asset gets cheap, someone will figure out how to utilize it to make money. If you consider our current housing situation, we see an excess of housing in certain parts of the country because of overbuilding. This has caused housing prices to decrease to the point that speculators are starting to buy them with the hope of future profits.

Now, if you simply put together some charts in a room, the economics of housing in certain areas simply don't look good. We continue to have high unemployment and excess housing, meaning that folks losing their jobs can't sell their houses and end up in foreclosure. Of course, we are starting to hear about some speculative initiatives that may easily impact this.

The simplest solution for banks and perhaps the Government would be to find a way to allow the current occupants to stay in these homes until economic conditions improve. Clearly, it is in no ones interest to foreclose on a house when there is no market for it. It would seem that a program that reduced payments for a period of time, with potential additional losses underwritten by the Government could go a long way to reducing foreclosures and potentially cost the taxpayers relatively little.

For example, suppose there is a family in a house with a payment of $3,000 a month. Now, perhaps the payment has recently adjusted, or one of the owners has lost their job recently and they cannot make this payment. If we assume that the cost of the foreclosure is $20,000 for legal fees and if the house's value in the marketplace is below the value on the bank's book, foreclosing on this house will be an expensive proposition. However, the bank's rules do not allow them to refinance the house since it possibly does not have enough value for the amount owed and the occupant's do not have enough income.

I would argue, that assuming the economy will recover and the occupant's will become employed again, that the bank's work out a payment that allows small payments to be made for a year. I think as part of the stimulus the payments should be backed up by the Government and the bank at the end of the year should be no worse off than they would be today. Effectively, this would mean that the bank would put a gap into the current mortgage and suspend it for a year. During that year interest would accrue up to the point that the payments made did not cover the interest on the mortgage. At the end of the year, the mortgage would either resume or if the situation had not improved, foreclosure would proceed. The increase in the book value of the asset, related to the fact that negative amortization had taken place for the year would be guaranteed under the stimulus plan. So if the bank asset per the mortgage at the beginning of the year had been 400,000 and because of negative amortization it was now 430,000, the Government would reimburse the bank the portion of the 30,000 not recovered in the sale of the asset. So if after foreclosure it sold for 300,000 the bank loss would still be 100,000.

Now, to qualify for a program like this, certain conditions would have to be met and the closer the occupant could come to paying the full interest costs, the less the potential cost to the Government. Also, every foreclosure avoided this way would save the banks a significant amount.

Just thoughts.