Washington Finally Proposes Real Help to Deal with Foreclosures

The Washington Post reported on Friday that Washington is finally considering meaningful steps to deal with the on-going foreclosure crisis. The article reports:

“A top Treasury Department official told a Senate panel yesterday that the government is considering a proposal to allow homeowners to stay in their home as renters after a foreclosure.”

The administration appears to be conceding that all of its proposals to date have been complete flops. The report goes on:

“Under the federal program known as Making Home Affordable, lenders are paid to lower borrowers’ mortgage payments. About 160,000 loans have been modified into lower-cost loans so far. The administration has said the federal effort has already been more successful than previous programs.”

That program was designed by the lenders, who wanted yet another government hand-out. But it was doomed to fail because mortgages that have been packaged into complex securities cannot be modified easily. If, instead, the government had directed aid to homeowners from the very beginning, it could have slowed the downward spiral of real estate markets. Reports yesterday put the number of foreclosures this year at another 2 million, with similar projections for next year. What is needed now is relief for the millions of families who have lost, or will soon lose, their homes.

Allowing families to stay on as renters after a foreclosure is a step in the right direction. However, the government should go further by following the plan put forward by Warren Mosler, as I summarized previously:

When banks begin to foreclose, the government would step in to purchase the property at the lower of market price or outstanding mortgage balance. Establishing market price in a glut is not simple, but it is not impossible. Mosler proposes that the federal government would rent homes back to the dispossessed owners [Dean Baker has a similar plan] for a specified period (perhaps two years) at fair market rent. At the end of that period, the government would sell the home, with the occupant having the right of first refusal to buy it. Reducing evictions by offering a rental alternative will help reduce the pain of foreclosure. It might also allow the process to speed up (with smaller losses for banks) since many families would choose to stay-on as renters, with the possibility that they could later buy their homes at more reasonable prices.

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About L. Randall Wray 64 Articles

Affiliation: University of Missouri

L. Randall Wray, Ph.D. is Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute.

His research expertise is in: financial instability, macroeconomics, and full employment policy.

Visit: L. Randall Wray's Page

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