The solution to the mortgage mess
As people like Mike Konczal and Annie Lowery try and explain the foreclosure mess, it’s worth stopping to think about a possible long-term solution to the crisis. And given the sheer quantity of insufficiently-documented loans, the only sensible and scalable solution I can think of is to swap out those bad loans for good new ones.
There are three main ways this can be done. The first is to refinance the current loan, possibly through HAMP. The second is for the banks and the homeowners to negotiate a principal reduction. And the third is to allow a short sale of the house.
So long as the banks make sure they get their paperwork right this time, any one of those three actions would solve the problem at a stroke. Even better, any one of those three actions should actually be preferable, from the bank’s point of view, to a foreclosure in any event. As RealtyTrac’s Rick Sharga told Chris Isidore, short sales typically take place at a 15% discount to the value of the mortgage, while foreclosure sales normally take place at a 35% discount. That’s a big difference.
For homes which are in the foreclosure process right now, it’s probably too late to attempt a HAMP modification, so the banks will have to switch to either a principal reduction or a short sale. But for performing loans, or those which are delinquent but not yet in foreclosure, all three options should be aggressively pursued. The good news is that mortgage rates are very low right now, so a refinance is generally in the homeowner’s interest anyway.
Logistically, replacing all those old mortgages with new mortgages will be expensive and time-consuming; certainly the loans in or near foreclosure should get priority. But it seems to me a market-based and transparent solution to a very large problem for which there is no legislative fix. (Or rather, the one legislative fix that’s needed has already happened, and will remain in force through 2012.) And if it ends up hurting banks’ balance sheets, well, that’s condign punishment for their failure to keep their paperwork in order during the boom.