The ugly math of foreclosure
Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos. Foreclosures cost 50-60 percent of the value of the mortgage whereas you might be able to keep someone in their house for 30 percent, he said. A house with a modified loan isn’t sold on, which further depresses house prices and errodes bank capital.
“What we need is a moratorium on foreclosure while we get a plan in place. We could have five to eight million more foreclosures in the U.S. if we don’t do something about this. Banks have already written down these mortgages.”
Big problem however is securities and contract low. Since so many of these mortgages are in complex mortgage securities it can be cumbersome or impossible to get everyone to agree to mods. The Fed is already moving to do just that on loans it has on itsbooks from Bear Stearns and AIG and is encouraging other owners to do the same.
A bad bank plan could also accelerate this, as the government will end up owning many more nonperforming mortgages which it can write down itself.
It is interesting to look at this in a British context, as they will be where the U.S. is shortly. There is a big difference between British and American law however, in that most U.S. mortgages are non-recourse, meaning that the lender can’t pursue the borrower for the money but can only collect the house as collateral. Not true in the UK, which has led some to argue that the house price falls will be less severe, as borrowers will be stuck with the house rather than banks. Simon Gleeson, partner in the London office of lawyers Clifford Chance, points out however that it usually doesn’t make sense to go after a borrower in the UK for their other assets, even if you have the legal right to.
“If they are giving up on what is usually their biggest asset, they probably don’t have too much else,” Gleeson said in Davos. So it was during the last UK crash, he said.
Bank of England loan mod programme anyone?
Jim Saft is a Reuters columnist. Any views expressed are his own.