Archive for the 'Government Interference' Category

Government Interference Delays Solviong The Problems

Government Interference Delays Solving The Problems  

In his latest misguided proposal, Obama wants to halt all home foreclosures until the borrowers have been afforded 5 chances to get a modification. 1. Government interference in the sorting out of distressed markets is never good unless it is in the form of the RTC which was able to simply seize assets and resell them to the highest bidder. The Japanese have painfully learned that the market needs to clear itself at whatever the market clearing price is. 2. The proposed program is nothing but price fixing. 3 The program assumes borrowers are all responsible and well meaning, and they want to have a modification. 4. This is another example of the Democrats thinking they know better than the market and the rest of us.

Reality is most troubled loans are held by homeowners who are either speculators, or by irresponsible borrowers who were simply greedy and did not care if they lied on their application or that they knew they could not afford the house. I have been in the business of buying residential mortgages. The entire culture of borrowers has changed. Even those who are true homeowners, and not speculators, have no sense that it matters to keep your mortgage current. Such thinking is further encouraged by the liberals who think it is the big bad banks who are wrong and not the borrowers.

When we tried to modify loans we found it was often impossible to communicate with the borrower. They did not answer calls or letters. It was often necessary to send a person to the house to make contact and then it was usually a waste of time. People  at the low end of the income ladder have generally low credit scores and so it does not seem to bother them that a default on their mortgage will hurt their FICO score. After all, Obama and Pelosi tell them they are not at fault and then the government offers to help them in their defaulting behavior by telling the banks they can’t act. What message does that send. In many states now the local courts are as bad and it is very hard to foreclose. This just reinforces the concept that as a borrower I can do as I please and they can’t bother me. Borrowers view is this is a way to live in the house rent free for a year or more, no mortgage payments, no rent, and when they finally throw me out I rip out the appliances and sell them for a couple of thousand dollars. In short, the government has created a whole new culture that there are no bad consequences to default and be irresponsible.

All they have done is delay the inevitable, cost the banks millions of wasted dollars chasing ghosts, and they keep house prices artificially high by not letting the defaulted inventory reach the market quickly to once and for all set a real price. This keeps poorly maintained houses in the neighborhood and hurts everyone. Investors who buy foreclosed houses generally spend $8,000-$12,000 per house to paint, re-appliance and fix it for new tenants or owners. This upgrades the area and the overall quality of low cost housing. It resets the pricing to where it belongs. That helps everyone.

In addition, just as they did in Chrysler, the government is proposing to interfere in contract rights which will have substantial negative consequences on future pricing and credit approvals, thereby hurting the very people they claim to be helping.

If Obama, Barney and Pelosi keep this trend of blame the banks, interfere with contract law, and protect the irresponsible borrowers, then we will have unintended consequences for many years to come which will grow to a problem of major proportions.