Realty Check

CNBC.com Fixing whats broken

Now that the Congress passed its big bad bill to save the economy or at least shore up the credit markets, attention is turning back to the crux of the whole problem; that being foreclosures.

News yesterday that Bank of America

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[BAC  Loading...      ()   ]is going to right all the wrongs inflicted by Countrywide has the foreclosure fixers all abuzz, but it’s unclear what is the perfect solution, if even one exists.

BofA is going to spend about $8 billion to either write down principal or lower interest rates or both on loans to primary residences where homeowners can afford to pay 34 percent of their incomes on their loans and if that 34 percent is really viable to afford a modified loan. It sounds like a great deal, a sort of juicing up of the private sector programs like Hope Now and the FHA’s Hope for Homeowners that are trying to do some version of the same.

But there is concern that a good chunk of the homeowners that receive modifications on their loans end up defaulting anyway. And given the way the economy is headed, the chunk is ever increasing.

There are other ideas out there, like one to give troubled borrowers one flat 30-year fixed rate at 5.25 percent, another to offer continuous workout mortgages which would change depending on the borrower’s ability to pay.

Look, I understand that in order to save the greater economy we need to fix the wrongs of the housing boom: the predatory lending, the faulty loan products and the irresponsible borrowing by speculators and owners alike. But lets be careful that we don’t nationalize housing any more than we already have, and lets also be careful not to start giving away houses to people as a reward for poor judgment.

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And one more thing: if we prop up all these faulty mortgages then we prop up home prices artificially—home prices that are still way too far out of whack with incomes.

Here’s a thought: How about we let home prices correct the way they should, allow more new, responsible borrowers to get into the housing market and rid housing of its newly speculative nature? Maybe then working families like mine, with two incomes and two kids, could actually afford a house with, dare I dream, a guest room.

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