Maybe What We Need Is More Foreclosures

The federal government’s interactions with the economy have been shortsighted, and government has refused to acknowledge that its own policies mandated bad mortgage lending practices. Policy has concentrated on blaming lenders for robo-signing foreclosure documentation and finding ways for lenders to accommodate troubled borrowers.

The result is slower housing recovery—and the economy won’t fully recover until housing does. An alternative might be to allow foreclosures to proceed expeditiously and not remove most owners from their homes, but instead turn them into renters. Keeping the occupants in these home as renters does two things:

(1) diminishes the personal and social dislocation associated with foreclosure and eviction, and

(2) prevent erosion in housing prices by preventing these units from coming onto the market.

I am not suggesting that this is easy. Foreclosures take place under state laws which are many and varied and most banks are not geared to be landlords. But unless policy starts to accommodate reality the housing market will resemble my Chihuahua spinning in endless circles chasing his tail.

The “it’s all the fault of greedy bankers” may make people feel better and may even get votes, but all of the effort to abate foreclosures serves only to prolong the agony of the housing market and the economy in general.