Saturday, February 23, 2008

Radically Moderate Mortgage Relief

Here's a quick half-baked thought. The Democrats are busy beating their breasts over predatory mortgage lending. Their solution to this is, predictably, to impose foreclosure moratoria and massive amounts of regulation on the industry going forward.

As usual, this will have unintended consequences. I suspect that the most likely of these will be that it will be almost impossible for responsible people with less-than-perfect credit to obtain a mortgage, which will deny a huge number of people the ability to own a home. That number will, of course, exceed the number of people who will lose their homes in the current crisis by an order of magnitude.

I got to thinking: What do sub-prime borrowers have to lose in a foreclosure? Their house? How is that different than if they were renting? Equity? In most cases, they didn't put up very much to begin with. The major problem they face is that they're going to have a foreclosure on their credit record. Assuming that the market improves dramatically over the next 3 years or so, those homeowners will be locked out until their credit problems age out.

So what if we merely enforced a five-year moratorium on reporting foreclosures to credit agencies?

Yes, people are going to lose their homes. But the impact of this wouldn't be markedly different from the situation they'd be in if they'd been renting the same house instead of "owning" it. (I have a difficult time with the concept of ownership when the asset in question is underwater from an equity standpoint.) Furthermore, smart lenders can put rental programs in place so that the occupants aren't even evicted. (On a lot of these properties, there simply aren't going to be buyers until the liquidity issues resolve.)

Note that this idea does absolutely nothing for rescuing the lenders or the holders of the derivative debt. That's a nasty problem and one that needs a very careful solution. A bailout is unpalatable but it's more palatable than going into a major liquidity drought. But the Democrats of course are more focused on the borrowers than the lenders. Seems like this idea would work well for the borrowers at virtually no cost to the lenders.

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