Thursday, December 4, 2008

The Fed Wakes Up to Foreclosures

Fed Chairman Bernanke expressed concern today about the foreclosure rate which he says is running on track for 2.25 million proceedings this year. Forcing lenders to lower published mortgage rates accomplishes nothing, because if home values are down, credit score requirements are more stringent, a household has a job loss and reduced income, and the lender's margin has risen, mortgages won't actually be closed at those rates to the people who really need help. The banking industry has never been set up to effectively and humanely handle large volumes of foreclosures, because it is something that they're not good at and something that was never anticipated on a large scale. The participants in the foreclosure business are yet another unregulated, unseemly lot. Unleashing this process on a large scale is like introducing termites into a house.

The Hubbard-Mayer plan, which we discussed in an earlier post aims to keep people in their homes, while resetting rates and loan amounts to realistic values. Lenders will have some write down issues, holders of securitized paper will cry foul, and there may be windfall gains to some homeowners. It certainly has some implementation challenges, but no more so than those created by the potpourri of ineffective plans and programs out there now. I believe that a form of this plan will in fact resurface, and hopefully we can decisively address the foreclosure problem in the near future.

Here is the earlier link to their publication:

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