Ireland tackles its housing mess; as should the U.S.

opinions

October 11, 2012 - 12:00 AM

Ireland has decided to bite the bullet on underwater mortgages and give its homeowners a break.
When the Irish housing bubble burst the government bailed out the banks rather than see them go broke. As a consequence the taxpayers there already “own” the banks and will take whatever loss occurs. Because more than half of the homeowners who have mortgages owe more than their houses are worth, analysts have decided that it makes more sense to write down the loans and reduce the payments to an affordable level than to foreclose.
One example was given: a woman with a $1,200 monthly payment says she could afford to pay $900 a month and could then keep her house. If the bank foreclosed rather than write down the debt, it would lose her monthly payment and be stuck with a house with a market value less than half of the original loan.
Ireland is different from the United States. Losses here must be borne by bank owners rather than the government. But the arithmetic works out the same. When banks foreclose here they also lose whatever payments were being made and find themselves in the real estate business in a down market. The Irish solution looks better.
Banks don’t want to be real estate agents. The families in the homes they bought want to stay in them. And the social dislocations that mass foreclosures would create would be huge.
The United States should bite the bullet, too.
The banks and mortgage companies should take much of the loss. As has been thoroughly documented, many, if not most, of the mortgages now underwater represent loans that should not have been made. Sales were made without adequate down payments. Some contracts allowed buyers to pay interest only at the beginning. Sales were made without a serious effort to match a buyer’s income to his or her payment responsibilities.
Most mortgages were not kept by the bank which made the sales but were sold to other banks and, all too frequently, were then packaged into bonds and sold to still other buyers — who had no knowledge about the houses or those living in them.
What happened then was the credit crunch that touched off the worst recession since the 1930s.
So, yes, the banks and other mortgage creators should write off a large part of the difference between the money still owed and the market price of the mortgaged properties.

IRELAND ISN’T treating every homeowner alike. Those who can afford to pay full price, will do so. To qualify for a write-down, a householder must show need. The same approach should be taken here. Those with means should have had enough money sense to avoid borrowing more than they could afford to repay and should be held to their contracts.
What Ireland is doing is marking down its housing stock to market. That is bank talk. Federal regulators require banks to revalue their reserves regularly as those reserves change in value, as bonds do when interest rates change. Housing lost half of its value in Ireland when the bubble burst. Writing off some of that loss — marking it to market — and reducing the payments on the smaller balances remaining would give the Irish economy a rocket boost forward.
Applying the same realism to the U.S. housing market would revive construction and send billions of additional dollars into the consumer economy. We should learn from the Irish.
— Emerson Lynn, jr.

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