February 12, 2008 (Housing Byte)
Housing Byte 

Foreclosure Freeze Is a Positive But Limited Step

February 12, 2008

by Dean Baker 

The plan that six major banks negotiated with Treasury Secretary Henry Paulson is a positive, but limited, measure to address the housing crisis created by their failed policies. Banks take substantial losses on foreclosures even in a healthy housing market. With house prices collapsing, the losses in many cases are likely to be close to 50 percent of the mortgage value. In such circumstances, a renegotiation of the terms of the mortgage is likely to be in the interest of both the bank and the homeowner.

It is unfortunate that Secretary Paulson had to work to convince these banks to adopt business practices that would almost certainly maximize their profit. Given the high and rising rate of foreclosure, it would be appropriate for the government to finally move beyond such voluntary steps and to adopt measures that actually guarantee some security to homeowners faced with the loss of their house. The own to rent proposal, which guarantees homeowners facing foreclosure the option to remain in their homes as long-term renters, is one such measure.

There are many other proposals that have also been put forward which would provide some security to homeowners. It is time that Congress enacts legislation that provides some security to the most vulnerable homeowners.  

Dean Baker is co-director of Center for Economic and Policy Research in Washington, DC. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102, or morgavan [at] cepr [dot] net. 

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