Foreclosure Blog

Washington’s Latest Scheme to Pay Homeowners and Institutions

The New York Times has reported on the new Obama administration plan to pay homeowners, lenders, and mortgage servicing companies to effect short sales and walk away from homes to avoid letting them go into foreclosure. The case is that selling will be better for the mortgage companies than foreclosing, while also helping mortgage owner’s credit scores.

Yet, it seems that the government is simply trying a different plan every few months in an attempt to pay banks money to get them to reduce the foreclosure rate, without any thought as to how these tactics give invitation to fraud and further unfairness in the housing market. It is unlikely that this latest plan will not turn out to be just as lacking as every previous government solution.

The main issue with this plan is that the short sale negotiation process is nearly entirely controlled by the banks. even though the lenders are “effectively forced” by government to take a predetermined price for a property, it is the lenders themselves that determine the minimum that they will admit to sell a house short.

The mechanism works like this: the institution contracts real estate agents to estimate the fair market value of a given property. This will determine the lowest price that the institution will accept from a short sale. If the borrowers find a buyer who offers that much or more, the creditor must accept it. Additionally, the creditor must give up any rights to sue for a deficiency judgment after foreclosure.

This leads to corruption across the country, as the banks will use local real estate agents to determine home values. The question arises, will these be the identical real estate agents that helped inflate the housing bubble in the first instance in order to increase commissions on sales? Although they did not play the largest role in the debacle, real estate agents did help fuel the buying.

Also, it is impractical to get around the issue that estimating the value of a property is always subjective. Even using comparable sales in an area is frankly a subjective estimate based on a small sample of other subjective estimates while filtering out other possible relevant subjective estimates. The banks will be using this information to determine the minimum sales price of a property.

The minimum price — as determined by the banks — will also be kept a secret  from the homeowners, who may have their own cost estimate done but which may be quite different than the lender’s estimate. This makes it nothing but a guessing game for the homeowners to come to the bank with an acceptable offer.

Furthermore, with the bank determining the value of the property on its own and keeping its estimation secret from the homeowners, it will be nearly impossible for the borrowers to know if the bank has received an acceptable minimum offer or not. What if the bank simply refuses a viable offer?  The homeowners will matter-of-factly be told it did not meet the back-room minimum.

Regrettably, this latest plan will likely be as successful as other previous government plans to halt foreclosures. Namely, it will be sold as a possible benefit to stressed homeowners, but in hindsight, it will prove to be an erroneous idea corrupted by artiface from top to bottom, as well as just one more misrepresentation of a market badly hurting for less bureaucratic intervention.