Dems show ignorance of mortgage business with proposed changes

Washington Post:

Congressional leaders yesterday gathered support for aggressive changes to bankruptcy laws that would help troubled homeowners, even as the Bush administration threatened to veto the plan and emphasized its opposition to any program that would risk tax dollars.

Democrats are calling for the government to do more than what the administration has done to date. They propose a range of initiatives that include the purchase of troubled mortgage securities by a federal agency and the empowering of bankruptcy judges to change the terms of high-interest loans held by homeowners facing foreclosure.

But the administration said that changing mortgage terms retroactively for a select group of troubled borrowers would only add to lenders' woes and lead to higher mortgage rates for everyone.

The clash highlighted the sharp differences between Democrats and the Bush administration over how to solve the nation's worst mortgage crisis since the Great Depression.

"Homeowners at risk of foreclosure are floating 50 feet from shore, and the Bush administration has thrown them a 30-foot rope," said Sen. Richard J. Durbin (D-Ill.), the author of a proposal that would allow bankruptcy judges to change the interest rates on subprime, adjustable and other nontraditional loans for homeowners facing foreclosure.

The White House and Treasury Department officials took pains yesterday to communicate a broader message, aimed at Capitol Hill and Wall Street: The administration would oppose the use of tax dollars to rescue banks, investors and homebuyers who made foolish financial decisions. Instead, it is counting on a plan that calls for the banking industry to voluntarily work out new loans with homeowners.

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There is an unreality about this debate on the part of the Democrats. You should start with the premise that lenders do not want to own houses, particularly if their current market price is below what they are owed. The would much rather work with the borrower to keep him in the house and keep the house off its real estate owned inventory. The problem is not with the lenders, but with the incentives the government has already given to borrowers to walk away from the house and the loan.

There is a question I have on the "foreclosure crisis." Where are all these walk aways living now? There do not appear to be an refugee camps or tent cities springing up. So where are they living. did they move in with relatives or are they renting for less than their old mortgage payment? None of the stories appear to address these questions, but the answer may provide some answers to what it would take to work out their loan problems.

One more question is worth asking too. How many were illegal aliens who have self deported? If so how did they get a loan?

Holman Jenkins looks at what makes walking away a rational choice for some.

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For starters, many homebuyers in the last two years were rank speculators, taking out zero-down subprime loans, then walking away when the bet didn't pay off. A careful study of recent Massachusetts foreclosures by Federal Reserve Bank of Boston economists suggests that the key factor wasn't an inability to pay, but an unwillingness to pay, once falling house prices made homeownership no longer a winning speculation. These people are already skipping out, because that's their best option.

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Then on top of that is the predatory borrowers who worked scams to defraud lenders too. There is little chance than a workout of any type would work for them.