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Tuesday, April 29, 2008

Foreclosures and Policy Making

According to this article foreclosures continue to rise as the housing crisis worsens.

Home foreclosure filings jumped 23 percent in the first quarter from the prior quarter, and more than doubled from a year earlier, as more overextended borrowers failed to make timely payments, real estate data firm RealtyTrac said on Tuesday.

One of every 194 households received a notice of default, auction sale or bank repossession between January and March, for the seventh straight quarter of rising foreclosure activity, RealtyTrac said.

Of course, this is at this point barely news. Foreclosures are rising and they will likely continue to rise indefinitely. What was of interest to me was this paragraph buried deeper in the story.

"In most of the states with the highest levels of foreclosure activity, we're still seeing the fallout from overheated home prices and people overextending themselves with risky loans to try to buy those properties," Rick Sharga, vice president of marketing at RealtyTrac, in Irvine, California, said in an interview.

Now, this is a statement that I have echoed before myself. In fact, I venture to predict that this view would be echoed by most mortgage professionals in the country. That's because most mortgage professionals know that whatever role they played they had willing partners, not naive dopes, in borrowers. I would take this statement one step further and say that rising foreclosures everywhere are the result of folks over extending themselves and taking on risky loans.

This assertion would have significant implications to future policy regarding mortgages. If in fact the crisis is a result of simple overextension then any bailout or help is patently unnecessary and counter productive.

So, then, why, if most mortgage professionals hold the view that the crisis was caused by overextension and taking on risky loans to chase out of control real estate, are policy makers so insistent on providing bailouts? Why would we bailout folks that simply took on more than they could chew? Well, first, it is because mortgage professionals are not asked much by policy makers how the crisis happened and what we should do. Mortgage professionals are seen as the bad doers and thus their opinion is irrelevant.

Thus, you have a fallatious view that borrowers were duped and now need a bailout. Policy makers are all too willing to listen to any sob story of borrowers that fell on hard times and make that the centerpiece of their policy. Yet, they likely would never listen to the thoughts of a mortgage professional because they are seen as the cause of the crisis. Of course, this is not only unfair but also faulty. A borrower was only a part of one loan. A mortgage professional was a part of hundreds if not thousands of loans. Yet, their thoughts and opinions mean very little. I doubt you would find very few if any mortgage professionals that think that any sort of a bailout is a good idea. Yet, that seems to be the conclusion of most policy makers. So, it appears that policy is being determined regarding housing with little to no consultation from anyone that worked in the field. Such faulty priorities leads to faulty policy. That is exactly what we have, and it should surprise no one.

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