Saturday, January 31, 2009

The Case for Foreclosures: Foundation of Recovery

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford. If the intent is to help the credit markets, then foreclosure is undoubtedly the best solution.

Foreclosures provide the foundation of recovery, both for Main Street and Wall Street. As properties are foreclosed, they can move from weak hands to strong hands. Households that have been foreclosed upon today are the buyers of tomorrow, when given a chance to recover.

~"Why Be a Nation of Mortgage Slaves?" in today's WSJ, Ramsey Su

3 Comments:

At 1/31/2009 12:40 PM, Anonymous Anonymous said...

Of course Obama and the Dems are trying forestall foreclosures and rewrite the original mortgage contracts.

What will be the impact on lending when banks realize that they cannot take possession of their property and the contracts they enter into can be rewritten at a whim?

 
At 1/31/2009 7:23 PM, Blogger QT said...

One notes however that zero default is not the law in all 52 states.

One thing that foreclosure does do is return the asset to the lending agency. When one looks at securitized mortgages, we are looking at an asset class characterized by a stream of payments. Once the stream of payment is gone, however, there is a hard asset in its place which can be sold albeit at a lesser value given market conditions.

While securitized mortgages have been marked to market which is zero because there is no market, the actual home value has not been 100% impaired or even 50%. So the market price of the securitized mortgage actually reflects market panic rather than the value of the underlying asset.

By waiving the terms of contracts, the democrats are inadvertantly inserting more uncertainty into the situation and prolonging the crisis. All around us are heart-wrenching stories of homeowners struggling to stay above water and politicians are expected to do something about this catastrophe. While bankrupcty is a devastating experience, the alternative can mean taking 10 years to work your way out of debt.

Creating an underclass of endentured servants in the name of home ownership is surely not the goal.

 
At 2/01/2009 4:22 AM, Blogger bobble said...

" . . . household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet."

agreed. the foreclosure prevention argument is bogus in many cases.

homeowners should walk away from these mortgages (what better payback to the shoddy mortgage lenders?), pay off their credit card debt and come back in a few years to buy what will then be reasonably priced homes.

 

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