Sunday, August 29, 2010

Give the banks a monetary incentive to do the right thing.

Guilt doesn't work.  Shame doesn't work.  Threats don't work.  "Affordable homes" programs don't work (see here and here for some examples).  What might work to get banks to agree to modify mortgages quickly and reasonably?

The first thing to realize is that banks are businesses.  Some might not be run very well, but they're businesses.  And businesses respond best to financial incentives. 

I've blogged about some possible incentives before (see here).  Give the banks a reason to write down the principal due on underwater mortgages, perhaps by agreeing to take any profit above that write-down if the house sells in the five years after the write-down.  The homeowner gets a lower principal balance that's more in line with the real value of the house.  The bank gets any upside for a reasonable time after the modification, if housing prices rebound.

Of course, we'd also have to deal with the accounting and tax implications of such a change.  Banks don't have an incentive to write down the value of these underwater homes; without either a positive (benefit) or negative (penalties) incentives, banks are engaging in behavior designed to inflate the value of their collateral.  Too many banks are foreclosing but not selling homes, in part because selling would set a real value at odds with the book value.  Not only are the banks not selling the foreclosed homes, but they aren't keeping up the property or the payments on the HOA dues (see here).  Banks are dragging out short sales beyond all economic reason.  Unless we figure out a way to provide financial incentives to get banks to behave better, all of the shame and guilt and anger in the world won't get them to change.


Joseph C. McDaniel said...

First, you are certainly correct about motivating banks. They're not particularly evil, and they certainly aren't benevolent, but they do understand money as a motivator.

Second, you are one smart ballroom dancer!

And I love your comment about the metaphysical challenge of persons vs. bankruptcy estates!

Nancy Rapoport said...

Thanks so much! You made my day!

Affordable homes said...

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