Monday, August 20, 2012

Reducing Foreclosures - a policy failure?

Today's New York Times has a front page story that probes the history of the Obama Administration's efforts to deal with the national foreclosure crisis.  Though it's a news story and not commentary, the piece leads inevitably to the conclusion that the Federal government's intervention on this issue was not nearly enough to significantly influence events for the better.  Still, the dilemma faced by the administration is clear: the policy most likely to rapidly end the foreclosure crisis and cause real estate to rebound was to reduce the outstanding principal of many people facing foreclosure whose mortgages were underwater.  There were a couple of very large problems with this approach.  Assisting those who failed to pay their underwater mortgages but not those who kept up to date, would be inequitable.  Then, many who were in very stable financial situations with their homes would be extremely resentful that tax dollars were being used to bail out friends and neighbors from what they perceived in most cases as self-inflicted financial wounds.  While this attitude is both justified and just, the consequence of doing nothing, it turns out, was damaging to everyone by prolonging the poor housing market.  Perhaps this will be a lesson to future policy makers although I suspect the political pressures then will be no different than they were this time; best not to get into such a mess in the first place. 

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