[Epaphras]

Mitt Romney offered his own solution to the foreclosure crisis the other day, which is to "let foreclosures run their course" and let the market bottom-out, allowing investors and new buyers to buy and fix up distressed properties and start the recovery. Essentially saying that it can be a quick, sharp pain, or a long, dull pain -- but either way we have to find the bottom, and right now the government's policies and programs (including those from the previous administration) are delaying that process.

This is in contrast to President Obama's plans to help keep under-water homeowners from going through foreclosure, to keep them in their homes through various means, mostly on the lender-side. These include delaying foreclosures, allowing homeowners who aren't behind in their mortgage payements to refinance at the new value of the home (with the government subsidizing the difference, I assume), and other methods.

Which approach is best? Does it depend on the perspective?

From an economic standpoint, it makes sense to find the bottom of the housing bubble by allowing foreclosures to continue unimpeded, but on the other hand (the "human" standpoint), what about all the people who will be thrown out of their homes? Many of them were simply buying a house at the wrong time (2002-2005) and weren't otherwise high-risk borrowers. If they put 10-20% down and within 3 or 4 years the home is worth 30-50% less, they are "upside-down" but not because they were fools.

On the other hand, for every family that might be foreclosed on, there are families like mine that are renting, saving, and waiting to pounce on a high-value home buy (home in a neighborhood that we otherwise couldn't afford, but the price dip down to be accessible because of a foreclosure). Then again, there are already a ton of bank-owned properties for sale out there, so perhaps we should focus on keeping non-foreclosed properties current and sustainable, while at the same time making it possible for first-time buyers and investors to burn through the existing inventory (instead of adding to the inventory with more foreclosures).

[Plexi8759]

I wouldn't necessarily call them fools either. Me and my family are also renting while saving for a house in the future. The govt. Encouraged loans at less than ideal market standards and I have to say if I had the opportunity to get a loan I couldn't afford I might have done it if I misjudged my abilities. It would be easy to do.

[Bryan]

Many of the foreclosures that are happening are for people who are unemployed. They had a home and were paying it but lost their job when the economy reset. Now they can no longer find work or work that pays enough to keep their home.

If they were lucky enough to have been living in it for a long time they can probably sell it and pay it off. But if they bought it a couple of years before they lost their job, then they'll probably be upside down and won't be able to sell.

I would rather refinance the home at the current appraised value with the government subsidizing the difference. That way they end up with a smaller mortgage payment and the bank doesn't lose principal on the original loan (they still lose some interest income). But they keep most of it.

Remember, the whole mess with the economy started because of foreclosures. Banks lost income. They couldn't balance their books and meet the obligations to their depositors. Keeping more and more homes from foreclosing is good. Letting homes foreclose is bad.

[Ax]

Originally Posted by Bryan

Many of the foreclosures that are happening are for people who are unemployed. They had a home and were paying it but lost their job when the economy reset. Now they can no longer find work or work that pays enough to keep their home.

If they were lucky enough to have been living in it for a long time they can probably sell it and pay it off. But if they bought it a couple of years before they lost their job, then they'll probably be upside down and won't be able to sell.

I would rather refinance the home at the current appraised value with the government subsidizing the difference. That way they end up with a smaller mortgage payment and the bank doesn't lose principal on the original loan (they still lose some interest income). But they keep most of it.

Remember, the whole mess with the economy started because of foreclosures. Banks lost income. They couldn't balance their books and meet the obligations to their depositors. Keeping more and more homes from foreclosing is good. Letting homes foreclose is bad.

Yes, lets let the government take on more debt so it can crash like Greece.

Neither solution is good. Homeless rates are really bad, OTOH, it does seem like we're just prolonging the inevitable by keeping these families afloat. I think the lesser of two evils is keeping them afloat.

[normajean777]

It doesn't teach anyone a lesson in responsibility if their bills are publicly paid all the time. That just can't end well.

[alexarean]

Yeah agreed

[Epaphras]

Originally Posted by Bryan

I would rather refinance the home at the current appraised value with the government subsidizing the difference. That way they end up with a smaller mortgage payment and the bank doesn't lose principal on the original loan (they still lose some interest income).

Couldn't it be argued that the foreclosure process leads to the same end, and through a much more efficient means?

In other words, the foreclosure process results in the bank recouping at least some of the principal through the sale at auction. You're right that they lose some interest income, but that is part of the risk the bank takes in lending the money. The bank made the loan originally knowing that it may have to foreclose and get hosed when it went to auction.

Foreclosures also free up inventory for buyers, either residents or investors. And it doesn't mean that the original homeowner becomes homeless -- each foreclosure purchased by a new homeowner means that homeowner's apartment or previous residence is now available for the displaced homeowner to move into, right?

I'm just worried that direct subsidization will screw up the market dynamics and result in people who otherwise wouldn't be able to afford their home, staying in their homes, thereby locking out a lot of upwardly-mobile potential buyers who now can't get into a home that would otherwise be available.

That creates upward pressure on home prices (more buyers chasing fewer homes) which, if there is a government subsidy to help under-water homeowners refinance, means the government expenditures would increase dramatically. If they are being refinanced at ever-increasing market prices, the difference between the principle and the market value (the amount the government would subsidize) would increase, resulting in runaway costs for whatever government program would be doing this.

[pfirst]

1. The original loan problem started when congress lowered the qualifications on getting a loans. Loans were given to people who normally would not qualify.
2. People made bad decisions in purchasing homes they could not afford.
3. The economy tanked because the government spends too much of our money.
4. Even though the value of a home has dropped as long as you can keep up with the payments, you are not in trouble. The value has gone down but in time will probably come back. If you are forced to sell, it is a real hardship.
5. Government won't get us out of this problem. they don't make jobs that are self sustaining. Any government started jobs cost 4-5 times more than the money it generates. In the last stimulus package the average job cost the US taxpayer $250.00, the worker got $31,000 for one year. Not a good return.
6. Are you willing to take money out of your pocket to help pay for someones poor choices,
These are the things I ponder all the time.