The Mortgage Crisis: Time for Real Solutions

by: Markham Lee

A common call from “mortgage activists” and social commentators has been for the banks to “forgive” a portion of the mortgage principle for people facing foreclosure, to halt foreclosure proceedings for a couple of months, etc.

The idea is that the person is merely a victim of the banks, and the bank is the one that needs to step up and make it right. Now political figures are jumping on the bandwagon: presidential candidates are proposing mortgage rescue funds, state legislatures are proposing moratoriums on foreclosures, Ben Bernanke is calling for banks to forgive part of the principle owed, etc, etc. While I’m sure many of the people calling for these things have the best of intentions in mind, their proposed solutions are cures that are worse than the diseases.

More importantly, their cures indicate a lack of understanding of the true nature of the problem: no matter how you slice it, the majority of the people facing foreclosure are those that either spent too much or simply weren’t financially ready to own a house. Principle forgiveness, mortgage moratoriums and bailouts don’t truly address those problems, unless our government is going to start giving people enough cash to make their mortgages affordable, put them into a positive equity situation or make their payments every month. At the end of the day, the solutions proposed by the activists and politicians will just delay the inevitable and make the housing crisis last longer.

Don’t get me wrong, I’m not a big fan of the banks and I think they did many home buyers (and the economy) a disservice via low loan standards, bad risk management and their own bad decision making. BUT, does our society want to get into the habit of footing the bill for people who were misguided at best or financially irresponsible at worse? Finally, do we really want to support policies that will extend the housing crisis and indirectly over-inflate housing prices?

Again I believe in the altruistic motives of the people proposing solutions to the housing crisis, I just don’t think they realize their cures are much worse than the disease.

True solutions to the housing crisis should be in the form of re-educating the consumer about home ownership, and the banks adopting more realistic standards for originating mortgages. The “assistance” for people facing foreclosure should be in the form of getting them into an affordable housing situation (cheaper house, or renting), or perhaps the banks “forgiving” the hit to their credit rating. Another idea would be for banks and real estate agents to collaborate in matching up qualified buyers with people facing foreclosure, in order to make it easier for people to sell their way out of trouble. If there is debt left over after a house is sold, make it easier for that debt to be rolled into a personal loan, unsecured line of credit, etc.

There are a lot of effective and relatively easy to implement solutions available, if people just confront the reality around what’s truly behind the housing crisis.