Dean Baker's Simple Idea To End The Foreclosure Crisis
Aug 20, 2010 at 3:51 PM
DailyBail in dean baker, foreclosure, foreclosure, housing, housing

From economist Dean Baker:

Discussed by Baker in detail here:

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Current policy has two ways of dealing with homeowners who can't pay: Foreclosure or mortgage modification. Neither of these approaches is working to stabilize the market.

Foreclosure isn't helping, because it adds to the supply of homes. It's also devastating to neighborhoods and to the families who've been evicted. Banks can't -- or won't -- keep up with the volume of delinquent loans, so it takes them a long time to foreclose. In the meantime, some owners have simply stopped paying and are living in the bank's home for free, creating a moral hazard of the first degree.

Mortgage modifications haven't put a dent in the number of foreclosures, so that's not helping in a macro sense. And for the families involved, it means paying too much for a house that they'll never own. Many, if not most, of the modified loans ultimately default. Billions have been funneled to the banks, with very little to show for it except higher profits.

Here's Baker's solution, proposed more than three years ago. I still haven't heard a good argument against it.

Instead of foreclosing on a loan and evicting the family, the lender should take ownership of the house and rent it out to them at a market rate for an extended period.  In many areas, rents are much lower than mortgage payments, so the family can afford to stay put.  Eventually, once the market recovers, the bank could sell the house.

What are the benefits of the Baker plan?

What are the drawbacks to the plan?



 

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