Tuesday, January 27, 2009

Taming the Foreclosure Tsunami

Underwater House Los Angeles

The Los Angeles Times reported today that a new law intended to help homeowners in distress has caused the number of Notices of Default – the first step to foreclosure -- to drop to its lowest level in a year. In the fourth quarter of 2008, 20% fewer NODs were recorded than during the previous quarter, and 7.7% fewer than during the same period in 2007.

All is not rosy, however. 2008 ended with a steep rise in the number of defaults, suggesting the tsunami of foreclosures has ebbed temporarily, but still poses a major threat going forward. Common wisdom suggests that the real estate market won’t stabilize until the number of foreclosures is brought under control.

The Obama administration intends to tackle the foreclosure problem aggressively. Various proposals have been put forward including: (1) a six-month foreclosure moratorium; (2) a doubling of the mortgage interest deduction; (3) a tax credit for those who buy homes; and, (4) a federally sponsored mortgage refinancing program.

The Obama administration is petitioning congressional leaders to commit $50 billion to $100 billion "to a sweeping effort to address the foreclosure crisis."

What no one has clearly addressed is what the government and banks are going to do with homeowners who are “underwater” -- whose mortgage debt is higher than their home is now worth. Will the bailout that is rescuing the citadels of Wall Street, sputtering auto companies and deadbeat home buyers leave these citizens pursuing the American Dream high and dry?

Jamie Adner