At this time, it's pretty clear that the government's efforts to modify mortgages haven't done enough to prevent foreclosures. In over a year, the HAMP program has resulted in just 435,000 permanent mortgage modifications, which falls far short of its goal of preventing several million foreclosures. Meanwhile, home sales are struggling and foreclosures continue in high numbers. New York Times columnist Gretchen Morgenson argues that new action should be taken by the government to stop the housing market from bleeding out. Her suggestions have made some waves in the blogosphere, as there's some good and some bad in what she suggests.
Short Sale Stigma
First, she notes a problem: struggling borrowers engaging in short sales are often forbidden from obtaining a new mortgage for several years. Considering that banks are having trouble selling their large inventory of homes, it certainly isn't helping to limit the supply of potential buyers. But in noting the problem, she stops short of saying that these standards should be universally loosened. Felix Salmon of Reuters picks up on this, saying:
So, the first, easy thing to do is to get rid of the blunt restrictions on lending to people with a short sale in their recent past: the housing market needs all the potential buyers it can get, right now. Once upon a time, it might have made sense to think that people with recent short sales would be such bad credits that no bank should think about selling them a mortgage. But not now, when the presence of a short sale on your credit report is likely to say much more about the broader housing market in your region than it does about you.
There are two situations to consider here. First, should government enterprises like Fannie, Freddie, and the Federal Housing Authority be allowed to insure new mortgages to short sellers? Second, should banks? Really, the policy solution should only concern the first. Banks can underwrite whatever sorts of loans they please with their own money, and the government shouldn't interfere with their prudent underwriting standards. The problem, of course, is that these days banks don't want to back any mortgages without a government guarantee, which is why the GSEs' willingness to do so matters.
There are two sides to this argument. If you believe that these short sellers really are high quality borrowers who were in an once-in-a-lifetime bad spot that led to their short sale, then you'll agree with Salmon. But if you think that, defying financial logic, these short-sellers would have stuck with their mortgage if they were truly high-quality borrowers, then it's prudent for the strict criteria to remain in place. After all, if the housing market falls again, they might just walk away next time. The answer here is more subjective than objective, and it ultimately depends on whether policymakers are comfortable changing the rules with taxpayer money backing loans to short sellers.