Monday, November 24, 2008

Foreclosure Mess

Fannie and Freddie, which are now government-run entities, announced last week that they are suspending foreclosure sales until after the holidays. Read about it here, but let's paste in one little blurb:
"Freddie Mac is on track to help three out of every five troubled borrowers with Freddie Mac-owned loans avoid foreclosure this year," Freddie Mac Chief Executive David Moffett said in a statement. "Today's announcement builds on this momentum and provides a new measure of certainty to many of these families during the holidays."
A couple of comments.

The government couldn't clean up after Katrina, how does anyone expect it to be able to clean up an economic crisis so complex that it can't even be explained, let alone understood? Prediction: this will only prolong the misery both for homeowners and taxpayers.

Note the term "avoid". Government is much better at avoiding (and helping others to avoid) than it is at achieving. What's being avoided is the inevitable. Unfortunate as it is, this is the bursting of a bubble. Some people own homes that they never could and never will be able to afford. Others bought or borrowed at the top and now owe more that their home is worth. Putting the sale off until after the New Year is simply that--putting it off.

As I predicted, now that the government runs Fannie and Freddie, feelings are being introduced into the decision process. Freddie now is the the business of "provid[ing] . . . new measure[s] of certainty" to delinquent borrowers. This is to be expected bc. where there is government involvement, there is politics, and where there is politics, feelings often become more important than sound economics.

Finally, this policy will encourage others to stop making payments. After all, if you and your neighbor both are under water and he has stopped paying but gets to stay in his house, why should you pay? There's no consequence.

Who knows, maybe it's better for everyone if delinquent borrowers are allowed just to squat where they are for a while. The banks certainly don't want the properties and vacancies only add to the downward spiral of real estate values in any neighborhood. On the other hand, moving folks out who can't afford to be where they are, and moving them out as quickly as possible, may be more humane and will certainly bring this mortgage mess to a speedier conclusion.

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