Foreclosure endgame

Our view: More-aggressive government action is needed to stop bad mortgages from continuing to drag the economy down and overwhelm neighborhoods across America

April 13, 2009

When experts are asked to diagnose the root cause of the nation's current economic pain, they are almost unanimous in concluding that it was triggered by a mortgage foreclosure crisis that has yet to be adequately attacked. In February of this year, nearly 3,000 new foreclosures were filed in Maryland, bringing the total number of current foreclosures in the state to 12,977. In Baltimore, a continuing flood of foreclosures has been undermining decades of hard-fought revitalization in neighborhoods across the city.

Last month the Obama administration put forward a new program aimed at keeping millions of families facing foreclosure, but that effort has been slow to get off the ground and millions of others may be left on the street for an array of reasons. Banks and other lenders still are not required to participate, and various technical issues will likely block participation by many homeowners. Contributing to the challenge, rising unemployment is putting more families at risk of losing their homes.

It's hard to envision a recovery any time soon as home values sink lower, undermining the quality of life in neighborhoods across the nation, where foreclosed homes sit vacant and uncared for. That's why a new federal agency modeled after the Depression-era Home Owners' Loan Corporation should be created. It would much more aggressively pursue loan modifications by using eminent domain or other government powers to purchase toxic securities from banks and rework as many loans as possible to make them affordable over the long term.

Something like that program is already being experimented with by the Federal Deposit Insurance Corp., which recently helped a group of investors purchase more than $560 million in mostly delinquent residential loans. They bought the problem loans at a value of only 38 cents on the dollar and are offering steep discounts to borrowers to encourage them to remain in their homes.

Many banks are resisting forced sale of their troubled mortgage loans on the theory that when real estate prices recover, they can regain most of the value of the assets. But foreclosure is a losing game for banks now. When banks foreclose on homes, it can cost them thousands in legal fees and other expenses. Then the houses sit neglected, their value eroding. When sold, they typically go for 20 percent less than the already sharply lower current market prices. And the foreclosure itself contributes to a continuing decline in the value of other troubled loans the banks hold.

Politicians are hesitant about endorsing the idea of forced sale of bad loans by banks, in part because many people resent the idea of families being rewarded for buying homes they should have known they couldn't afford. In a recent national poll, only 46 percent of Americans said they believed the government should spend billions to help homeowners facing foreclosure on mortgages they cannot afford.

But without that help, the country will face a long struggle to revive an economy engulfed by bad mortgage debt.

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