Is There Hope For A Real Solution In The New Short Sale Plan

foreclosure

Another Monday, another set of plans to straighten out the mess that housing has become. This time, there’s a two pronged approach. Pressure the banks into writing off their second mortgages and get the homeowners to move on via short sales.

Here are the details as I see them:

  1. All of the parties get some money to participate. Homeowners get $1500 to sell and move, the bank servicing the first mortgage gets $1000 and, if there is a second mortgage, that bank that holds it will get $1000 to forgive and forget. The first mortgage holder obviously gets the proceeds from the sale.
  2. Realtors will determine the value of the home.
  3. The homeowner will not be told the valuation.
  4. Banks will be required to accept all offers that meet or exceed the predetermined value.

Sigh. Where to start.

Forget the walking around money that’s being doled out. It’s penny ante and probably wouldn’t induce anyone to do anything. It’s just thrown out there to put a little lipstick on this pig.

I don’t get the rationale for letting real estate agents determine the price. Isn’t that why we have an appraisal profession? I truly believe that most agents are honest people but why put temptation like this in front of any human being. Short sales have always been nightmares of potential fraud and this provision just increases the odds of that happening.

Once again, the administration seems to be exceeding its authority in mandating this process, particularly when it comes to requiring the banks to accept a price that they had no role in negotiating. I understand that they have considerable leverage but as I wrote a couple of weeks ago, their willingness to exercise that power is troubling.

The larger question seems to be where are we going with all of this. If you get the feeling that we’re bouncing from one plan to another without any final solution in mind then join the team. Over the past year we’ve seen one program after another do seemingly everything in the government’s power to prevent foreclosures and keep people in their homes to, now, advocacy of short sales in order to get them out of their homes.

While I think that the plan is badly flawed, it nevertheless may represent a lurch towards the inevitable solution to the problem. It actually seems as if the administration is coming to the conclusion that like all asset bubbles, this one will only be settled when the markets are allowed to clear.

I’ve pointed out before that the S&L real estate crisis was only “solved” when the government threw in the towel after years of trying to game the system and allowed the suspect assets to be sold at market prices. If that’s where they’re heading now then that’s progress.

I’ll bow to political realities and admit that you can’t just say throw them all out, foreclose and get on with life. There’s also a valid argument to be made for helping to transition those foreclosed upon. But please, let this be the beginning of the end game. Do what you need to to disguise your true intentions, bend the accounting rules unmercifully to keep the banks solvent and make a mockery of contract law, just liquidate the damn inventory.

Sources and Others’ Thoughts: Calculated Risk, WSJ, NYT, Barney Franks Letter, Diana Olick

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