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Crashing The Rules

While reading Gretchen Morgenson’s column, “Housing Doesn’t Need a Crash. It Needs Bold Ideas.”, I was reminded of an experience I had while flying out of Nepal many years ago on PIA Pakistan Airlines.

Foreclosure
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Foreclosure

The story goes like this: my husband and I were heading home after trekking for weeks in the Annapurna region — needless to say, we were just a bit hungry, tired and, well, dirty.

We were following all the rules — showed up early, tickets in hand, seats assigned. And then, it started to rain. Not torrential rain — just some rain. Over the loudspeakers we hear “It’s raining. Free seating!” Huh? Suddenly, everyone rushed for the doors. It’s raining! No more assigned seats! No rules! Every man, woman and child for themselves! I never did get the connection — we all got more wet walking on the tarmac towards the plane because now there was a panic — everyone felt the need to push and be there first — the end of order.

And that is the vision I have when people suggest changing the rules for borrowers who execute a “short” sale on their underwater mortgage and now want to be allowed back into the game. Here’s what Ms. Morgenson wrote in the New York Times:

For example, delinquent borrowers who conducted a short sale are ineligible for a new mortgage insured by the Federal Housing Administration for three years; Fannie Mae blocks such borrowers for at least two years. Private lenders have similar guidelines.

Such rules made sense in normal times, but their current effect is to keep many people out of the market for years.

My reaction to these rules: Good. Those delinquent borrowers should be kept out of the market — there need to be consequences for sticking the bank / shareholders / taxpayers with your bad purchase.

Should we change the rules to allow exactly the people that are part of the problem back into the system? Why can’t they rent for a year? Or two? Is home ownership a right or, a privilege? And by the way, whenever someone’s “bold” idea has to do with Fannie Mae or Freddie Mac, I cringe. You can use all the innuendo you want, but it’s the taxpayer footing the bill for all those easy loans and bad lending.

Allow the market to correct and you will make homeownership more affordable for all. And while the idea of a housing “crash” is scary, maybe it’s making waves because it’s the first idea that begins to make sense.

Wall Street