It appears that something good will come out of the Congressional hearing that the House of Representatives held with bank executives. JP Morgan Chase is joining Citigroup as one of the few ”superbanks” that are halting foreclosures temporarily. JPMorgan will be suspending foreclosures until March 6th and Citigroup will halt foreclosures until March 12th. This plan has been announced after bank CEO’s received a grilling from Congress over their use of TARP funds, excessive compensation practices and unfriendly business practices. They were strongly urged by Congress to halt foreclosure proceedings until after the Treasury announces its new plan to help homeowners.
The Federal government is working on a 50 billion dollar plan that would help to stem the tide of rising foreclosures and hopefully bring a bottom to plummeting real estate prices. The government is considering using subsidies to help homeowners make mortgage payments. I think that this is a start but it will take much more than 50 billion to solve this crisis. Ultimately the government will need to get the banks and investors to cut the principal on some of these loans. Loan modifications are the only way that I see to solving the foreclosure crisis. CDO’s and mortgage backed securities have complicated things because you may have a bunch of different investors that have a stake in the same properties.
If a family is living in a house that has a $500,000 mortgage and the house is only worth $350,000; there is no motivation for the family to continue to pay the mortgage. Often the family will just walk away leaving the bank with another home to auction off. The government needs to let banks know that it is better to get something than nothing. Earning $350,000 from the house is better than to auction it off and get much less. Government subsidies will help and should be a part of the plan but a reduction in principal will help even more. A temporary cap on adjustable rate mortgage interest rates and new home buying incentives will help us to start to clean up this mess.
Photo by respres
