Trouble for Nevada’s Foreclosure Mediation Program

(Mark Noonan) – From the Las Vegas Sun:

…The program Friday released the first-year results showing that 29 percent of lenders did not appear for mediation sessions, had no authority to make a deal or did not bring all the documentation required.

Nevada has one of the highest foreclosure rates in the nation, and 11,716 people applied for the state program to get a chance to meet with their lender to work something out with a mediator present…

I do have a bit of personal experience here, though not in the actual mediation program. To nutshell it, I’ve been trying to work things out with my lender since late 2008 and it has been a complete nightmare. The right hand doesn’t know what the left hand is doing and this has resulted in a series of gross errors from the lender which has driven me up the wall. And now I see this and find that the lenders aren’t showing up for the mediation sessions, or don’t come ready for them.

The problem, I think, lies in the fact that the people running our financial institutions haven’t the foggiest notion of what they’re doing. The firms, themselves, are lead by carbon-copy business school graduates who climbed the corporate ladder – a ladder where ability and intelligence count for far less than whom you know and whether or not any gigantic mistake is attached to your name. Know the right people and don’t entirely screw things up, and you’ll rise to the top.

Stuck in the complete melt down of our financial system – and my view, which is held by many others far more knowledgeable than myself, the entire financial industry is functionally insolvent – the leaders are ill-equipped to map out an exit strategy. Its not supposed to work like this – slumps are supposed to end after a while and then high profits are supposed to return, making everyone at the top ever more wealthy and allowing them to retire as successful businessmen. Faced with the fact that things aren’t getting better, they are at their wits end.

And, so, the confusion. Some people get foreclosed on lickety split; others go for years without making payments with nary a peep out of the banks about it. Some people get modifications and everything is fine. Some get modifications only to find that the bank changes its mind a few months later (this is, among many other absurd things, what happened to me). Some don’t get modifications, at all – while still others get them and then re-default. Some people go in to short sale (selling the house for less than the mortgage balance) and are then pulled in twenty different ways by banks, buyers and real estate agents in a many-months long process which often ends with the house still being foreclosed.

No wonder more and more people are going for “strategic default” – this is where you can make the payments but just decide to bag it and find somewhere else to live because your house is with vastly less than the mortgage balance. Personally, I think that there’s a lot to be said for it – provided you don’t mention it to the bank. I think that attempting to work with the bank just draws attention to yourself and thus puts you in to incompetent hands who will screw things up royally day after day.

What to do? First off, admit that any solution will not satisfy everyone. Secondly, think about what we want.

From what I have learned, there could be as many as 8 million houses of “shadow inventory” in the United States. These are foreclosure homes which are held off the market for fear of collapsing housing prices even more. We don’t want to add to that pile. Keeping people in their homes if they can in any way, shape or form make payments is the ideal in keeping houses off the market. My preferred way of doing this is “cram down” – reducing the principle balance to be in line with current market value. This, of course, only works for people who can make payments, so even under ideal circumstances, it won’t be for everyone.

The second step is to clear out the “shadow inventory”. My preferred method here is to provide incentives for long-term leases of foreclosed houses. Using the tax system, I’m sure we can work out a way to make it worthwhile for the banks to develop a property management combine which would then lease out foreclosed properties, with preference being given to those people who have lost their houses via foreclosure – and, in addition, offering such lease deals to people who are in or going in to foreclosure (ie, they would stay in their home, but it would become bank owned, with them leasing it for 2 to 5 years). This would get a very large number of the foreclosures off the market at least for the next few years, thus preventing another massive downturn in home prices.

In the long run, our housing market is not going to be fixed until the overall economy improves and people can start contemplating home purchases on a large scale. Even then, I doubt much that houses will ever return to pre-crash valuations. But we need to do something – and it will take imaginative thinking outside the financial industry to do it, as those within the industry have proven themselves utterly incompetent.