Government to Pay Homeowners to Sell at a Loss

Starting April 5, the federal government will give homeowners in danger of foreclosing money to sell their homes at a loss. The New York Times has the story:

More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year.

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed.

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

The new program requires real estate agents to determine the value of a home to the lender, writes the Times. If someone offers that predetermined amount or higher, the lender has to take it. So much for neutrality on that front. I’m not quite sure why the government decided on that particular detail–lobbying perhaps?

Another interesting component of this plan is the small amounts of money the government is giving out to banks and homeowners. Although I doubt the lender on a first mortgage would care much about an extra $1,000, the lender of a second mortgage, who risks losing everything to a consumer not worth collecting on, might. Also, $1,500 relocation assistance isn’t that big an incentive to move out, unless you’re desperate. The desperate crowd is clearly who the government is targeting here.

But if the government is pandering to desperation, it is merely accelerating a process that would have happened anyway. I have trouble seeing what this plan will actually accomplish. For example, the program could accelerate an existing process to increase cheap real estate supply. This, in turn, would stimulate purchases by vultures waiting to scoop up deals. The government would then compile stats stating that real estate sales are up, bolstering its economic legitimacy during an election year.

But are there enough homeowners in said desperate state, and banks willing to accept such small sums, to make that happen? If that is the case, isn’t the government actually depressing home prices with its new program? Who wins here–and how?

  • This is the problem with plans/programs devised by people behind closed doors with very little knowledge about the far reaching implications of knee jerk policy decisions. The law of unintended consequences is relentless in its pursuit of any policy weaknesses, and as sure as the sun rises in the East unintended consequences will play havoc with any and all reactionary policies imho.

  • Cromagnum

    I suspect they are trying to reduce the size of the final powder keg. Banks have until 2012 to clear all bad/toxic loans off thier books.

    Can you name one Politician who would prefer to not have a large amount of foreclosures in 2012?
    It might not take a traffic cop to see this speeding drunk car coming down the road, but the fruit vendor sees it.