*** This is re-posted from my blog on Active Rain***

I heard voices…

And they were smart voices.

Wandering around in the Rain, there have been scores of bloggers pointing out that the federal government trying to “fix” the foreclosure crisis.  Now, Inman News is saying the same thing.   (the link will only be good until it goes behind the curtain)

Most families facing foreclosure today were on weak financial ground, he says, and “will defy every effort” at workouts. “Even extraordinary rewrites will beget re-default, the poorly maintained house creating deeper loss in the ultimate foreclosure, the troubled inventory overhanging the marketplace and preventing recovery,” Barnes writes.

And goes on to say…

In an effort to prevent foreclosures, consumer groups and Senate Democrats want to give bankruptcy judges the power to cram down mortgage loan modifications over the objections of lenders. (see recent blog post, and watch Inman News headlines Monday for details on how the cram down provisions in S 2136 have been rolled into a more sweeping foreclosure prevention bill, S 2636).

Supporters of cram downs say voluntary efforts by loan servicers to engage in workouts with borrowers haven’t done much to slow the pace of foreclosures, and that any increase in mortgage rates won’t be as drastic as the industry predicts.

Although Barnes didn’t address cram downs in his latest column, I thought it was interesting that he raised foreclosures and mortgage market liquidity in the same breath, and concluded that it’s the credit crunch, not foreclosures, that pose the biggest threat to a recovery.

They also point out…

Pavlov and Wachter’s December 2006 paper, “Aggressive Lending and Real Estate Markets,” looked at the use of ARM loans in 22 Los Angeles neighborhoods where prices fell more than 21 percent between 1990 and 1995. Perhaps not surprisingly, prices fell harder in neighborhoods where ARM loans were more prevalent. But the study’s most surprising finding was that it wasn’t the higher default rates on ARM loans that sent home prices plummeting, but their lack of availability during the downturn.

So, a lot of people that study these things are saying that the government, trying to provide relief is doing EXACTLY the wrong thing.  Of course, it is populist to go after the banks and talk about corporate greed and not personal responsibility.  (BTW, remember that those ideas are coming from both sides of the aisle).  Instead of helping people and getting us past this, it will only delay and increase the severity.

The cry of all of the people that aren’t being foreclosed are losing value is a valid one… but, is it not worse to drag the problem out and make it take a decade for price recovery than to let the market find its bottom and work through it in just two or three years?  Would those responsible borrowers and homeowners not be better served by the restoration of their equity sooner, rather than later?

Feel free to post links back to other blogs with arguments on both sides of this issue.  (Note:  I did not post links to A/R blogs that echoed this sentiment.  There are a lot.  I have read a bunch of them.  Feel free to post links to your blog.  I didn’t want to miss a good one… and there are many.)

Game on…

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