Thursday, March 03, 2011

Finding the appropriate penalty for problematic lenders

Today's New York Times reports that federal regulators are having trouble reaching an agreement on the size and ultimate use of fines that will be imposed on lenders that short-cut foreclosure procedures. While the banks seem amenable to negotiating a dollar amount for this fine - $20 billion is the number now being floated - there is a dispute about how that money is to be used. This article claims that some want to use the funds to assist homeowners who are underwater on their mortgages in an effort to catapult the housing market into better times. Those who disagree with this strategy contend that bailing out people who might otherwise be able to stay current on their loans would provide a negative incentive - people might be less likely to keep paying in the hopes of obtaining a bailout.

How to aid the revival of the housing market is a very important issue. Right now in America, there are 2 million homes in foreclosure and another 2 million homeowners who are behind in their payments. Fully one-fifth of all home loans exceed the value of the homes. While there has been a significant decrease in the number of foreclosures initiated in the past five months, some suspect that's only caused by banks deferring foreclosures because of a variety of legal difficulties. The best remedy for this problem would be a reasonable increase in the price of housing which depends on the continuation of low interest rates and the continued growth of the economy.

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