While news stories, articles, and blogs continue to be written about “Strategic Default” and how those facing foreclosure shouldn’t be allowed to walk away or have their mortgage balance reduced, punishing foreclosure victims only continues the pain for all of us. The problem we face isn’t one of a few hundred or even a few thousand who carelessly spent beyond their means; this issue touches tens of millions of U. S. homeowners, the majority of whom acted responsibly, and with the knowledge available to them at the time. Most thought they were making wise choices.
How can we blame the homebuyer for not seeing the fallacy of never-ending home price escalation? In their recent testimony before Congress, the heads of the big banks said they didn’t see it. Jamie Dimon, Chairman and CEO of JP Morgan Chase said, “Somehow we just missed that home prices don’t go up forever,” an erroneous assumption shared by the U. S. Treasury. And if the “brilliant” minds on Wall Street didn’t see the crash coming, who could expect those on Main Street to have superior knowledge?
Regardless of what Mr. Dimon may have known, few anticipated the intensity of the housing crash or the scope of its reach. It’s time to stop blaming the home purchaser and to accept the only workable solution for both them and for the housing market in general. It’s time to see beyond what we perceive as the “morality” of the solutions for those facing foreclosure, and to look to what solution best serves the country as a whole. And that is to reduce the principle of homes underwater to their current value. Such an action would immediately help to stabilize a large portion of the market, and would protect neighboring homes from further declines in value. It would not affect the bank’s or investor’s equity, for the homes are only worth what they’re worth; and foreclosure sometimes results in below market returns.
Those who speak of the inherent unfairness of such a solution fail to consider the ultimate damage of continued foreclosures, the consequences of which will depress home prices for years. If we’re serious about solving the foreclosure crisis, let’s address the underlying cause—homes worth less than their mortgage.
I’ve recently seen comments from some who said, “I don’t care if my home declines in value, I don’t want to save those who acted stupidly.” And while I doubt that those making such statements really aren’t concerned about future decreases in the value of their own home, I do think they want to punish those who they perceive as taking advantage of the situation. However, the problem extends beyond housing, and millions will continue to suffer until we begin to restore economic order and sanity. We must do something; and the palliative measures of government have demonstrated their inadequacy to bring solutions. What is needed is bold action, from leaders unafraid of the political consequences. Whether it’s legislation to allow for “cram-downs” or forcing banks to lower principle balances on homes underwater, to fail to enact a workable solution is to allow the morass to continue; indeed to perpetuate it.
Finally, in an effort to inject a bit of humor into this otherwise depressing topic, watch the Stephen Colbert video on this topic.
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