Strong and swift action from the government to stem the tide of mortgage foreclosures may be politically popular, but bailouts and forced loan modifications can’t solve all the problems resulting from “underwater” mortgages.
While the goal of making lending both transparent and fair is laudable, severely restricting how and when loans can be written – or, in foreclosure renegotiation cases, rewritten – has made it harder for people to get loans.
There are no winners when a bank forecloses on a home. Lenders, who typically lose up to 40 percent of their original loan when they foreclose on a property, already have every incentive to work with borrowers. It is in the lender’s best financial interest to keep families in their homes and paying down their mortgage.
The best course of action for the government today is to allow the markets to run their course and allow individual lenders and borrowers to work out loan arrangements. Where fraud and mismanagement exist, the market will purge the rot in the lending system if left alone. The government’s increased role in the mortgage market not only risks recreating the asset bubble that preceded the housing crash, but also puts taxpayers on the hook for billions of dollars in mortgages guaranteed by the government.
