Foreclosure Crisis

The Lehmann Letter (SM)

Today's New York Times carries a front-page article on "Flawed Paperwork......" by Gretchen Morgenson:

http://www.nytimes.com/2010/10/04/business/04mortgage.html?_r=1&ref=todayspaper

It's about the foreclosure crisis and begins with these paragraphs:

"As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.

"The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions."

The article goes on to describe and discuss the banks' rush to foreclose and the corners banks cut in order to ram an unprecedented volume of foreclosures through their bureaucracies. It's worth reading.

But more importantly the article tempts one to pause and reflect on what might have been done in order to prevent this sorry state of affairs. Suppose the federal government, at the beginning of the real-estate crisis, had mandated the following refinance program for troubled and underwater loans: The substantial write-down of principal to an affordable level, with the federal government saving banks harmless by compensating banks for the loss. That way loan values could have been crammed down to levels borrowers could afford without stressing lenders. True, the program would have cost plenty and there would have been complaints of moral hazard. Yet it might have prevented the current crisis.

The federal government has instituted a small number of voluntary programs with limited success. Consequently the market has run and is running its natural course. Millions have lost or will lose their homes, and the entire economy is being dragged down by its real-estate anchor. What an irony that the banks' paperwork skullduggery may eventually gum-up the system and slow foreclosures. Wouldn't it have been better to plan ahead?

© 2010 Michael B. Lehmann