I was moderating a panel of two governors and an economist today on the foreclosure crisis. It was much of the usual stuff until Pennsylvania Gov. Ed Rendell made a bold proposal.
He said that in addition to the legislation making its way through Congress to save troubled borrowers, there should be additional provisions that protect borrowers from having their credit rating destroyed when they go through foreclosure.
I understand where he’s coming from. “This is not for people who took risks,” he says. “This is for people who were legitimately duped by unscrupulous people.”
He wants all those borrowers who were the victims of predatory lending to get a clean, fresh new start, and I can see where that is a very good, sound argument.
It’s just not practical. For many many months I’ve heard many many policy-makers, lawmakers, and decision-makers argue for the good of those poor borrowers who were tricked into faulty mortgage products. They paint a picture of not ignorant, but perhaps uneducated folk who truly believed that they were buying into a sound financial scenario.
But the fact of the matter is that a lot of borrowers, and not just the speculators, went in with their eyes open. They were told that their loans would adjust and that they could refinance based upon the current rate of appreciation. They bought into that appreciation; they gambled on it.
For the good of the greater economy, for the good of the states, for the good of our nation’s neighborhoods, it is best to find ways to keep Americans in their homes. But we are in the third phase of this foreclosure crisis (I stole this from Mark Zandi’s presentation today). The first phase in ’05-’06 consisted of borrowers who couldn’t really afford the initial payments on subprime loans.
The second phase, ’06-’07, consists of those who couldn’t pay the resets on adjustable rate loans. The third phase, in which we now muddle, consists of borrowers whose loans are more valuable than their homes. They can’t refi, and they can’t even sell. Many of these folks, some who don’t even have trouble paying their loans, are walking away from their homes voluntarily.
Foreclosure is, in many cases these days, unfair, but in many cases it’s quite fair, and borrowers shouldn’t be rewarded with a free credit ride. There has to be some accountability. Taxpayers are footing the bill for the housing rescue, as is Wall Street, and, with that, borrower accountability is essentially being tossed out the window.
With the sheer volume of borrowers out there in trouble, and the many different reasons why they’re in the shape they’re in, I can’t imagine any credit-cleaning legislation that isn’t going to let a whole lot of folks off the hook, folks who might in fact deserve a little lesson in what credit is all about.
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