In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.
There is much more here. I would be surprised if the proposed incentive of $1,500 made a noticeable difference. If I understand the program correctly, the servicing bank also gets $1,000, plus $1,000 toward a new loan.
Let’s keep in mind that foreclosure is a government program from the get go. So it is actually the government paying the homeowner to leave to reduce the foreclosures they enforce at behest of the banks so the banks don’t have to take the full losses they deserve for instigating mass foreclosures.
I’ve enjoyed some of the insights from Keynes, but in execution this stuff sounds ludicrous.
This makes no sense.
My understanding has been that the problem with lots of people being foreclosed is that if they are foreclosed and have to leave, they have no housing and we might have a bigger homeless problem on our hands. Plus their former houses might become unoccupied and act as a magnet for gangs and vagrants. So the desirability of keeping people in their houses is counterbalanced by the moral hazard of bailing these people out.
My pet, uninformed, solution for this would have been for the government to have taken over the bad mortgages, convert the mortgage payments to rental payments, and have people stay in their homes essentially as public housing tenants. Which frankly they should have been from the start (many of these people had no business getting approved for a mortgage). I am sure there is some reason that I’m missing that the government can’t do this, since it seems to be coming up with increasingly elaborate schemes to avoid this solution.
So the new policy is that if people have mortgages they can’t afford, to not only forgive them the mortgage, but to give them money and to tell them to leave? Is someone deliberately trying to come up with the worst possible solution to the problem? Now we get the abandoned properties AND the moral hazard?
Do people realize that after decades of subsidizing “home ownership” and discouraging renting, there are simply not alot of rentals available in many areas?
Thank heavens. As Contemplationist said, this is what we should have done from the start. The market is filled with a bunch of junk, and we just need to flush it out as soon as possible.
I’d expect this to work. A short sale is a lot more hassle for a homeowner in default than foreclosure is. In one case you have to deal with the bank, lawyers, contracts and financial planning. In the other you just find a place to rent before the credit hit comes, and leave. $1500 could make all the difference in persuading a presumably-cash-strapped family to go through with the short sale.
Its been a surprise, and frankly a huge disappointment, to me that both the Bush and Obama administrations have focused on giving liquidity and incentives to the banks, rather than to the homeowners. The latter is more effective, more compassionate, more reliable and above all else it helps clear the market. Giving money to banks to help with their liquidity is like trying solve drought problems by pouring tap water into rivers, plus by allowing them to hold bad loans for longer, it stops the market from clearing rather than helping.
What they should have done is tied the bailouts to the banks to incentives for bank organized help for the home “owners.”
You could not, by the way, have a market-wide bubble of these proportions without an irrational expansion of credit. This is the fault of the banks and government. The buyers were simply paying what they thought a rational market was telling them was appropriate. The market was irrational due to the expansion of credit.
So far, neither banks nor government have been held to account.
I would have been happier using the tax laws to solve the problem
Today, if someone receives government assistance in purchasing a home ($6k credit) or this subsidy, it inures to the seller, not the buyer, or the buyer may be well off (e.g., first time buyer $6k subsidy).
Why not make a market exchange: in exchange for these subsidies, you stay in the house, but when you sell it later, there is no exclusion from capital gains tax, but rather a tax on the gain. Some people would be happy to defer payments till later, and I would be happy to tax them on the gain to pay for this so they do not get a gain at the taxpayer’s expense, as they do now with no taxes on a gain.
I’m not sure how I feel about this proposal. On one hand, some people are hard-working and have hit a tough spot by getting laid off from their job. Then, on the other hand, there are irresponsible people that have bought houses that were out of their budget to begin with.
This, I must say, I blame on the banks. They have carelessly loaned money to people for houses they should not have been buying. Now, the banks are so scared of losing money that it seems they don’t want to loan to anyone!
I believe in helping people when they are down. I do not believe in helping out banks that should have practiced safer loaning with our money! The foreclosed upon people do need some assistance, but the banks deserve none.
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