American Madness

Intelligent Criticism in the Service of a Better Nation

Our Mortgage Foreclosure Problems!

Posted by Joel Friedlander | No Comments

I write this because the newspapers are constantly complaining about the fact that the Obama Administration is unable to save us from the mortgage crisis.  I don’t think that we need to be saved.  We need to accept what happened and let the people who cannot afford their houses be moved out of them.

Millions of American homes are in foreclosure.  Each day we hear of more coming.  Presently, there are about 4.2 million homes in foreclosure.  Should we try to stop the process?  I think that the answer depends upon how you view the process of home ownership.  When a house is purchased, generally speaking, a large sum of money is borrowed from a bank, with the borrower signing a promissory note for the debt, and securing that debt with a mortgage.  That mortgage gives the bank the right to sell the security if the borrower doesn’t pay the periodic payments when they come due and owning.  The process of selling the security to recoup the money loaned is a foreclosure.

This is not a new process in America, it has been going on as long as we have been a Republic.  It will go on long after we get past the current crisis.  What is different is that in the past mortgage loans were limited to local savings and loan associations that knew the local housing market and supposedly knew the borrowers.  Those local banks also held onto the paper once the loaned the money.  They also managed the loans themselves.  The system worked well for many generations until the Congress in its very limited wisdom let any bank issue loans.  When that happened the large banks that issued mortgage loans were unwilling to keep the loans on their books so they sold the paper.  This was always possible, but it wasn’t done with any frequently when the local banks were making the loans.

The current crisis had many causes, but a major one was that a local bank only made secure loans because they were going to have that loan as a source of cash flow for a long time, while the large banks made slipshod loans and didn’t check out the people who were borrowing money.  Yes, I know, the Congress wanted to promote home ownership so this was one way to get there.  Bunk, no large bank wants to manage loans so they sold the paper immediately.  The process broke down even further when those unchecked mortgages were packaged as financial instruments and were sold all over the World.  Now we have a crisis of Worldwide proportions.

If you aren’t paying your loan the bank has a right to sell their security so that they can get their money back.  What has created a problem is that the banks alienated their paper several times and no one knows who owns the paper anymore.  Until the banks can figure out who owns the paper the foreclosures will go very slowly.  Once they can prove who owns the paper they will move more quickly.  There should be no expectation that mortgagors who are no longer paying for their property are going to live there forever for free.  They have to pack up and leave when the time comes.  No one has the right to live for free

Once the houses are vacant they can be fixed up by the new owners, the banks, and then sold or rented to new people.  If the prices don’t drop a great deal however, no one is going to buy them!  Everyone is going to take their lumps, and that’s how it has to be.  No actions by the Administration will change this procedure.  Sorry!

I don’t think that this is going to destroy America.   Eventually there will still be plenty of housing for everyone, just with different owners.  I don’t think that the American Dream is just about owning your own home.  I think that it goes deeper; being able to do whatever you want no matter what your father and grandfather did for a living.

I think that we have to let the prices of housing find their real level, which is the level at which people can afford to buy a house without expecting that they are going to be able to afford it because of inflation or that they will be able to refinance it in a couple of years.   If a person can’t afford to buy we need to make it respectable for them to be renters.    Let the system find its own equilibrium!


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