Equity Private has a
bright idea for how to help mitigate the worst effects of the housing mess:
include mortgage debt in bankruptcy proceedings. She doesn’t go into a lot of
detail – that’s promised for later today – but I assume the idea
is that the lien on the property would remain, but that the principal amount
of the mortgage could be written down.
Certainly, such a proposal would avoid the costs of foreclosure, which is expensive
for lenders and disastrous for homeowners. But I do fear for the unintended
consequences of messing with the very foundations of secured lending.
I’m still a fan of the proposal
from Dean Baker and Andrew Samwick. Allow lenders to take possession of
the property, but allow the (former) homeowner to continue to live in it, paying
a market rent. The costs of foreclosure to the homeowner are minimized, while
the lender continues to get an income from the property as well as owning it
outright.
I suspect deals like that will happen more frequently as the foreclosure rate
rises, even if they’re not mandated by law. Lenders at the moment tend to be
inflexible and unimaginative in foreclosure situations, but sooner rather than
later they’re going to realise that they’re shooting themselves in the foot
and that owning a large inventory of empty, unsold, and borderline-unsellable
homes is not a business they really want to be in. In other words, even if Congress
doesn’t step in, the market just might find a sensible solution on its own.