Quote of the Day

Sam;

Since the debate has moved to this thread, I resend my last post from that other thread (Iknow is the guy I was responding to there):

Iknow is right about the economic impact of widespread foreclosures. I would counter that the entity that is most aware of this fact, and able to act on it, are the banks themselves. Banks lose alot of money if a house goes into foreclosure. They have to pay legal fees to proceed with foreclosure, money to maintain the property while it is waiting to be sold off and fees to dispose of the property. They lose even more money if the price they can fetch is depressed due to alot of foreclosures in an area.

It is for this reason that foreclosure is the last resort for banks. They could save themselves alot of money by renegotiating a loan, if it is possible to salvage the situation.

I would argue that it is for this reason that the banks themselves are the best arbiters of the "renegotiate versus foreclose" decision. They are incentivized to avoid foreclosure where possible, and have the means to judge someone's ability to meet the new terms.

My fear is that if the government takes on this role, they will be ham-handed, and there will be a political dimension to their decision-making that will get us into further trouble down the road. Let's not forget one of the largest roots of this housing bubble: Alan Greenspan kept interest rates low for too long in the years 2002-2005, because he wanted the banks to recover their losses and stimulate the economy after the dot-com implosion. He looked like a genius at the time, but now we know better. I'm afraid of a repeat of this situation.

Posted by: benson at January 26, 2009 4:02 PM

Denton;

You are probably correct about the mortgages that have been packaged into CDO's. The problem there is that no one is "in charge", and has the authority to renegotiate the loan. These loans are sort of on "automatic pilot",headed for the crash of foreclosure. I'm not sure what can be done in this case, as the Constitution does not allow the government to void a private contract. Perhaps in this case some program like that Northsloperenter is suggesting is in order. Perhaps the government can provide these folks some relief grant towards the loan, with the understanding that they share in the eventual upside.

For those loans that are held by the banks and/or Fannie Mae, I would encourage loan renegoatiation on a case-by-case basis, as I advocated above.

Posted by: benson at January 26, 2009 4:35 PM

Traveller;

No one can doubt that the banks lost their minds the past few years. Our economy cannot funtcion, however, unless they sober up, and no amount of government intervention can work unless we get the banks back in charge of the business of financing.

Where would you draw the line if the government stepped in? We would be on a slippery slope towards nationalizing the banks. Thomas Friedman of the NYT (whom I generally don't like) put it well a few months ago: can you imagine Google (as a start-up) calling up a government-run bank and asking them for a loan for this crazy idea of a search engine with a button that says "I feel lucky".?

I know that there are shades of gray in this issue, but we should proceed very, very carefully. So far, we've been too rash. We've already been through one stimulus package and half the TARP money. What has it gotten for us, except more debt issued to foreign countries?

Posted by: benson at January 26, 2009 4:43 PM