Foreclosures and the Government

I remember and old joke that went: Beware of someone showing up and saying, "I'm from the G'ubment and I'm here to he'p you."  That still seems funny today because when someone from the Government says that, we all laugh, hold onto our wallets, and run for the nearest door. 

Well, these aren’t the old days anymore and it's not a joke. There are tragic consequences of relying upon government intervention.  For example, I really feel sorry for anyone along the Gulf Coast who expected disaster relief from the ravages of hurricane Katrina. Mismanagement of that tragedy continues.

With that in mind, it's not all that difficult to imagine why so little has been accomplished by the government's efforts to lessen the impact of the foreclosure problems on the citizens.  There are a number of initiatives that have been launched to help people by restructuring debts to help people stay in their homes.

It is very difficult to get a handle on the exact number of people who have benefited from initiatives like the Hope Now Alliance, the expansion of FHA loan limits, and increasing loan limits at FannieMae’s and FreddieMac. For example, the Hope Now Alliance, a consortium of the majority of lenders, counseling services, and trade associations stated that over a million homeowners had been helped. For the press release, see http://www.fsround.org/hope_now/pdfs/17-28FebruaryRelease.pdf

If you recall, the number of homes that had been predicted to be foreclosed upon was estimated to be something like two million. Thus you might be led to believe that half of them had been helped. The talk from the street paints a different picture.  It has been claimed by some groups that over half of the borrowers who are in foreclosure never even bother to call their lenders.  More and more seem to be moving out and mailing their keys to the lenders.

Other stories tell of phone calls never returned. Obviously no help there. Still others say that rather than being restructured, in many cases borrowers are just being given more time to catch up on payments. That seems to me to be a little like allowing a condemned man one additional cigarette before letting the firing squad get on with its business.

Meanwhile the Foreclosure Train is rocketing down the tracks and as housing prices drop, more and more homeowners find themselves upside down, owing more then their homes are worth. About ten percent of homeowners now find themselves in that position. That group will include many otherwise creditworthy borrowers who cannot now refinance out of toxic loans because their equity has evaporated. Without equity and facing more stringent lending standards, they are unable to refinance.

Regardless of the arguments against a bailout, I think that there is a role to be played by government beyond being a cheerleader. Perhaps they  just don't see how they personally are affected by something like the buy out of troubled investment bank Bear Stearns by JP Morgan Chase for a mere $2 per share. That stock was selling for more than $150 per share last year.

That is just a portion of the losses and write-downs that have been made public so far, something like $160 billion.  The larger problem is that, by some estimates, the total problem may be as high as $800 billion and that will touch EVERYONE. The economy lost 63,000 jobs in the last reporting period, and some of those losses were due to the credit crunch affecting employers.

This country is in a severe credit crisis.  Critics of government intervention don't yet see that the damage that can potentially be done by intervention is less than what will occur by doing nothing.