Why Wait Before Acting on Foreclosure?

Unemployment keeps rising. Foreclosures keep surging. Lending remains constrained. So what exactly is the administration of Obama waiting for before acting?

It may be true that a lot of time is required in order to show results of current policies, such as foreclosure relief, bank rescue and stimulus spending. However, it is also obvious that unemployment and defaults are much worse today compared to what was assumed back when such policies were originally formed. Therefore, the requirement of more federal help is simply inevitable, as well as political fights based on renewed aid. President Obama may wish to stay away from such battles until the health reform actually passes; however, he should still lay groundwork within three primary areas:

1. Foreclosure Relief

There has been a lack in the progress of bad loan modification. However, it is still not obvious what it is that is actually holding things up. It has been stated that preventing such avoidable foreclosures would be an objective that everybody shares. In fact, mortgage investors and lenders have a couple of reasons as to why they prefer foreclosures more than they do modifications. Among their reasons is how foreclosures allow banks to postpone receiving losses until the whole process is actually complete; this could take a year, if not more.

If this administration truly wishes to begin loan modifications, it must revive efforts in allowing bankruptcy judges to make use of bad loan modifications. Or, at least, it needs to impose such costs on banks that are laggard, such as higher premiums on deposit-insurance or higher debt guarantee charges.

2. Bank Rescue

The administration of Obama has, for now, greatly shelved its plan of financing the purchase of toxic assets of the banks, mostly due to the recent success of banks when it comes to raising capital. One other alternative explanation would be that these banks simply will not sell. Current accounting changes are making things less painful for these people to hold onto bad assets within their books. After all, why should they admit to their losses without having to?
Still, the adequacy of capital cushions of banks hinges, largely due to the success in stimulating the overall economy, as well as preventing foreclosures. If these efforts fail, consumer spending, employment and household wealth simply won’t rebound, so bank losses will end up deepening on home mortgages, credit cards, loans and commercial real estate. This would result in longer periods of subpar growth in the economy and tight lending, or even outright contraction.

3. Stimulus Spending

One argument against a round of stimulus would be that higher spending on deficit may scare bond investors and force up the rates of interest. However, the solution for this deficit would not be to forgo current stimulus when needed, but to lock into fiscal discipline in the long term.
If health care is taken care of and bough with certain gimmicks, the overall bond market may understandably get quite nervous. This would make the administration lose the credibility it has and needs in order to argue to receive more stimulus spending.

                                                

2 Comments »