Denial Blocks Real Estate Recovery
Foreclosure, Bankruptcy vs Home Affordable Refinancing Program ( HARP).
Kevin is not giving up without a fight. I know this because those words are written on a piece of paper taped to his front door. NOT GIVING UP WITHOUT A FIGHT! His house is scheduled to go to a foreclosure auction today.Kevin bought his home on July 8th, 2003 for $270,800. The real estate market here in Phoenix was stable at the time. The housing explosion was about 18 months away. After a quick public records search I discovered that Kevin took out a huge second mortgage in June, 2005 for $300,000. As of today he owes $570,800 (not including arrears, late penalties and legal fees) on a house that’s worth about $400,000. The reality is that Kevin is over $170,000 underwater. Here’s a little more reality – it will be more than 15 years before Kevin can sell his house and pay off the outstanding debt.This week the President of the United States, at a press conference in Las Vegas, announced an expanded Home Affordable Refinancing Program (HARP) to help underwater homeowners refinance their mortgages. The local newspaper made this front page news with a headline that read Arizona Underwater Homeowners to get Refinance Help. The first sentence of the story proclaimed:“More Arizona homeowners may soon be able to refinance to current low mortgage-interest rates, no matter how far underwater they are in their homes.”After reading this article I wondered. Who is in denial more, Kevin the homeowner or our federal government? Allowing homeowners to refinance bad debt collateralized by assets that have dropped in value by 50%, or more, is dumb. The plan is short-sighted and merely prolongs the inevitable.There is a very simple, yet painful solution to the housing crisis – a massive default.I first read about this idea last month. Brett Arends of the Wall Street Journal wrote a commentary titled Massive default is the best way to fix the economy. He proposes a national chapter 11 bankruptcy. Most companies with outstanding debt that far exceeds their assets and equity do it. Why shouldn’t an underwater homeowner have a similar option? Arends concludes that “The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.”Unfortunately, this will never happen. Not when the banks can scare a large percentage of their borrowers into paying their mortgage every month – even if it means draining their savings and retirement accounts. It certainly won’t occur with an administration that would rather apply a band aid to a gaping head wound than perform brain surgery.