No money, no savings, no equity: Why bailouts won’t work

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Regular readers know I am a fan of mortgage broker/Fed watcher/pundit Lou Barnes, and his column this week is worth your time. The final years of the housing bubble were not complicated, he argues: Bad loans were made to financially suspect borrowers, by the millions. Excerpt:

‘The elephant in the room, who cannot be mentioned in polite company: We gave mortgages to a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership.

‘That’s a hell of a thing to say about fellow citizens, but it is the case. ‘Sub-prime’ by definition meant below the minimum standards of the FHA. Roughly $1.5 trillion will default: half of sub-prime and a like amount of the worst of Alt-A.

‘A year of all-out foreclosure prevention by traditional means has failed: recasting, forbearing, capitalizing interest, refinancing, canceling adjustment ... all. The new measures include writing down loans to the level of fallen market value and refinancing the remainder. Fairness aside (deeply unfair to families who tough out this cycle), two realities will defy the new efforts. First, write-down/recast will leave these households still with no equity, no up-side to defend, and new monthly payments still higher than rent on equivalent housing. That ownership-rent gap has gaped throughout the cycle; the good news for a foreclosed family: Replacement housing is cheap and plentiful.

‘Those in authority demanding foreclosure rescue, Barney Frank and most of Congress, joined by compassionate Americans, cannot conceive the financials of a 575 FICO sub-prime applicant. A dozen or more late payments, several defaulted loans, and a large mass of consumer debt outstanding; poor job stability (temporary, seasonal, intermittent, commissioned sales); also no money, no savings, retirement or otherwise, often tens of thousands in consumer debt, huge negative net worth ... before purchase.

‘ ‘But, you bailed out Wall Street -- why can’t you do the same for these people facing foreclosure?’

‘Bear Stearns was not ‘bailed out.’ It was liquidated in an orderly manner.

‘Wise, tough-love policies would encourage rapid recycling of foreclosures, enabling quick acceptance of short-sale offers by servicers terrified of value second-guessing, and above all, making financing available for strong households to buy the foreclosures. The marketplace can absorb the volume, but it needs help. Orderly liquidation.

‘(Before you come after me with tar and feathers, know that my mother lost her Ada, OK., home as a teenager in the 1930s. I know what foreclosure means.)’

Your thoughts? Comments?
Photo Credit: AP