The U.S. needs to double down on foreclosures. According to the former FDIC regulator, Chairman Sheila Bair, forgiveness is the answer. Bair said that the banks had showed a “stubborn refusal to deal head-on with past-due and underwater mortgages,” and that it was “time for banks and investors to write off uncollectible home equity loans and negotiate new terms with distressed mortgage borrowers that reflect today’s lower property values.”
Foreclosure has become a dirty word, but the regulatory onslaught has forced the largest banks to improve their loan servicing and foreclosure practices, and deals such as the recent $8.5 billion mortgage put back settlement by Bank of America, actually spell-out myriad servicing, modification and foreclosure processing improvements.
So this is the time for banks to really push the foreclosure process, and maybe regulators and the rest of Washington crew consider process reforms to speed foreclosures through the courts.
But why should the banks automatically write off any second-mortgage or home equity line of credit that goes delinquent? If word were to get out, any borrower who was actually in a position to comfortably make their first mortgage payment, plus a payment on a second mortgage would seriously consider a “strategic default.” They wouldn’t lose their homes under Bair’s plan.
Bair does place some blame on consumers, saying that leading into the credit crunch, “it became old-fashioned to save up for the down payment on that first home,” and that “taking out a mortgage shifted from the most serious financial decision a family would make to a speculative bet on how far home prices would rise.”
Banks not only need to beef up their loan-modification efforts — as Bair suggests — but also greatly increase their mortgage foreclosure filings. Rather than taking a uniform approach, like Bair’s brilliant write-off of any “uncollectable” second mortgage, the banks need to analyze each delinquent loan and make the decision that best services the bottom line.
Either way, it enables them to move forward and clear out the volume, thus helping the overall housing as well.