Megan McArdle has some serious thoughts about home mortgage modification, concluding that facilitating workouts that allow the homeowner to keep the house may be less useful than facilitating short sales.
Speaking as a non-expert, I wonder whether this isn’t the (possibly) right solution to the wrong problem. Foreclosures are terrible for families, and not great for banks. But it’s housing abandonment that’s the nightmare for the neighborhood. In some cases, abandonment happens without foreclosure: the owner walks, but the bank decides it would rather own a bad loan than an empty, unsaleable property, and never perfects its title.
So what we ought to be aiming for, first and foremost, is keeping the structure occupied. There are homeowners who can’t afford their mortgages, even with modifications, but who could afford to pay a market rent. But banks don’t like being in the landlord business. Were that’s not true, it’s still usually the case that someone would rent the property for more than it costs to maintain.
What’s needed, it seems to me, is a quick nuisance-abatement process that can wipe out both the equity and the debt on places that aren’t occupied and aren’t being maintained, and maybe some assistance for the owners of neighboring properties – who have the biggest stake in preventing deterioration – to buy the “empties.”
Perhaps if we made abandonment the worst outcome for the banks, they’d figure out what to do to avoid it.