Force banks to avoid foreclosures?

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We read through the entire, 10-part ‘Dust Up’ on LATimes.com devoted to the foreclosure crisis, hoping to find a nugget we could pass on. And here it is: a consumer advocate argues lenders should be forced to avoid foreclosures by modifying loans so that borrowers can afford to keep their houses indefinitely.

Paul Leonard, the director of the California office of the Center for Responsible Lending, writes, ‘When loans are modified, borrowers should be able to afford their loans over the long term at the so-called fully indexed rate, not just the current payment level. Public agencies should be monitoring and holding lenders accountable for affordability outcomes from foreclosure-avoidance efforts.’

If we understand it correctly, this means that lenders would figure out how much the borrower can afford to pay, and then restructure the loan so that the borrower can keep the house by paying that amount.

As promised, our two cents: an interesting thought, and we disagree. If the borrower can afford only the initial two-year ‘teaser’ payment, but not the payments in month 25 and beyond, the borrower, sadly, cannot afford the house. This is the crux of the foreclosure crisis: People agreed to buy houses that they could not afford. Yes, the lender might have tricked them. If the trick was fraudulent, prosecutors should wake up from their long naps and take action. The lender has the option of being generous -- and perhaps self-serving as well -- and modifying the loan to lower the payments. But that should be an option, not a mandate. And if it becomes a mandate -- a bad idea, we think -- it most certainly should not be subsidized by taxpayer money.

Your thoughts? Comments? Insights?
Photo Credit: LATimes.com