How to clear the way for both foreclosures and loan modifications.
As America’s housing bubble has collapsed, it is clear that banks eager to foreclose quickly on defaulting homeowners have cut corners. In some cases, they have lied to courts and to the public. Banks have been foreclosing on homes whether or not they could prove that they had a legal right to do so.
The result has been to further destabilize housing markets, injecting increased uncertainty into home selling and buying. Distressed homeowners are looking for help to save their homes, or, if that isn’t possible, to find a buyer. Would-be buyers or sellers of homes may not be willing to proceed without knowing more about the foreclosure situation.
Financial markets are destabilized as well. Existing stakeholders in mortgages — including investors holding securities backed by home loans and stockholders in financial firms — are having difficulty valuing their holdings. Potential investors are reluctant to buy except at very low prices.
If nothing is done, we could face continued sluggish and restricted investment in real estate and the broader economy if the titles to foreclosed properties are seen as tainted. We could even see a second financial implosion if the scope of the problem appears large enough and uncertain enough to potentially overwhelm fragile bank balance sheets.
One solution is to stop foreclosures until ownership records can be sorted out. But while we may not know precisely who the homeowners being foreclosed on owe money to, we know that they owe it to someone. Distressed homeowners should not be able to avoid foreclosure simply because the right party to foreclose cannot easily prove that it is the right party.
More important, we can find a better solution. We can provide an impetus for mutually beneficial loan modifications, thereby helping get the housing recovery back on track.
Let’s bail the banks out of their self-inflicted wounds one more time, but this time extract a serious price that helps address the underlying problems.