Former REO Broker: Let the Foreclosures Roll

We’re starting to see some sanity appear in the financial press regarding the nation’s housing mess — even if only in the op-ed sections. This past weekend, a must-read opinion piece from former REO broker Ramsey Su in the Wall Street Journal makes the argument that has long been made here at HousingWire: the foreclosure process exists for a reason. No different than the emerging sense among some in the banking community that we should allow the bankruptcy process to do what it was set up to do. “If the intent is to help homeowners, then foreclosure is undoubtedly the best solution,” Su writes. “”Foreclosures provide the foundation of recovery, both for Main Street and Wall Street. As properties are foreclosed, they can move from weak hands to strong hands. Households that have been foreclosed upon today are the buyers of tomorrow, when given a chance to recover.” Bingo. By now, we’ve all read plenty of comparisons of the current mess to the 1930s, and in some ways we’re undoubtedly already there as an economy. But in one very critical regard, the current mess is nothing like the Depression-era — we have a nation of homeowners that are now more akin to renters than they ever were actual homeowners, at least in the traditional sense of the word. As we covered extensively in the most recent HousingWire Magazine, which looks at the unintended consequences of foreclosure moratoria, mortgages were a very different financial instrument then than they are today. The modern borrower, especially the most troubled among us, is underwater on their investment — but also has likely invested little in the way of equity to begin with into a debt instrument with a comparatively longer time horizon. Mortgages in the 1930s, by way of contrast, were much shorter in duration and required that a household put up far more in the way of their household’s net worth to obtain a property. In short, the loss of a home during the Depression era was more than just a mere psychological event — it was a psychological event precisely because it was also a catastrophic hit to any household’s financial wealth. Can we really say the same now? In most cases, I’d argue that the answer is NO. “Credit may be damaged, but homeowners can rebuild it,” Su writes in the Journal. “And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.” So instead of focusing on clearing the mess, much of our legislative effort is now being spent on prolonging the misery for both banks and borrowers — for borrowers, by putting them into modified loans that are the functional equivalent of indentured servitude; and for banks, by putting hastily-conceived policies into place that fundamentally change the nature of real estate lending in this country. Policies that will not only force larger near-term hits to a bank’s damaged balance sheet, but policies that will serve to constrict the flow of credit even further in the long run. Who can lend, but for the government, when no market participant maintains certainty over the security of the collateral that is to be lent against? These are the sort of questions we should be forcing our policy makers to consider, rather than the well-intentioned but misguided logic that has bought into the idea that homeownership is a right to be maintained at all costs. Write to Paul Jackson at [email protected].