I have to say I like the look of Obama's housing-bailout plan. It's quite elegant, and makes full use of the fact that Fannie and Freddie are now owned by the US government -- which means they can be forced to offer 105% loan-to-value mortgages even when the borrower isn't creditworthy at all.
Obviously, all of this comes at a cost to the US government: the figures being bandied around today range from $75 billion in the NYT to $275 billion at Bloomberg. But really nobody has a clue how much it will cost: that's entirely dependent on whether or not the plan succeeds in arresting the fall of house prices.
I especially like the idea of offering loan servicers $500 if they modify a loan before it becomes delinquent, especially if it's accompanied by an easy and streamlined mechanism for getting such modification requests into the Fannie and Freddie systems.
This plan isn't designed to directly help borrowers who are massively underwater: if your first mortgage is more than 105% of the value of your house, you're ineligible. That will help reduce some of the costs to the government, and move them over to the lenders, who now look as though they will be bailed in to bankruptcy proceedings -- a long-overdue development.
Incidentally, this plan is certain to increase the astonishingly high delinquency rates on non-agency mortgages, since it's basically designed to take most of the remotely viable non-agency mortgages and refinance them into agency mortgages, leaving only the complete and utter nuclear waste behind.
So the plan:
1. Forces the bloated and undercapitalized mortgage agencies to take on more debt without regard to creditworthiness
2. Cleans up only the least toxic loans
3. Will cost some unknowably huge amount of money
This is from a supporter.
My lunatic proposal for the day: why not make it easier to move homeowners out of homes they can't afford? Set up a streamlined foreclosure proceeding where a current or mildly delinquent homeowner can simply give the house to the bank and walk away. Do this with two legal provisos:
1. No tax on the forgiven loan
2. No black mark on the credit record. The bank marks the loan as fully satisfied.
The homeowner gets a fresh start, and the bank gets the house without the huge administrative costs that are normally associated with foreclosure. Everyone loses something, but no one loses a crippling amount, and there is no net transfer between two parties who are both in financial trouble.
dean baker made a lot of fuss about the need for the FED to pop bubbles. it is weird to see people of similar persuasion argue, now that the bubble has popped, that we should do our best to not let it deflate.
And ... how exactly do you enforce this? The bank can say whatever they want on their own internal documentation. You can still bet they'll tell Experian, TransUnion, and the other credit reporting agency that the borrower's a deadbeat, and their credit rating will precipitously drop based on "Our proprietary risk formula that no you can't look at".
What, you're going to force them to open up their process for outside inspection? Like that's going to happen.
***
Anyway, my proposal is for the government to just pay off the loans, but increase the tax rates on every borrower they saved until the loan is payed back with accruing interest. Since only evil pro-Laffer rightwingers believe that an increase in someone's tax rates can make the tax revenue go down, there's no worry that it will be paid off whatsoever!
What is a bank supposed to do with a house? The problem for the banks isn't the cost of the foreclosure, but foreclosing on a property worth substantially less than the loan.
All these problems you mention concerning paying back debts in the near future can be easily solved by creating massive runaway inflation, ala Zimbabwe - a Keynsian paradise.
Now is the time to buy things on credit so that you have something that can be used in a barter economy.
The borrower should be flagged as a deadbeat. No bank should ever want to do business with them until the terms are very clear the borrow has the finances to pay for the loan under the current conditions, plus being able to deal with a 15-20% change in pricing.
There was no margin of error in the pricing. Everything was assuming pie in the sky numbers.
I'm ok with a couple thousand greedy Wall Street bastards. They suck, but at least the scope of their impact is limited. I'm sure there are a lot of people like me that are pretty pissed off about the several million greedy bastards that screwed up our economy by buying more house than they could afford and are now trying to point the finger at the banks as if its their fault.
The banks were idiots too, but don't pass the buck when you also signed the document.
It cracks me up when we have people pissed off at Madoff, or Lehmen Brothers, etc when the exact same principles that drove those guys was the driving force behind the irresponsible people (to put it nicely) who committed themselves to way more house than they could afford.
I agree with MDF -- one of the issues is that the house is of less value then the loans on it.
The other is the suggestion that a bank owning the house solves the problem. Banks don't want to be landlords, realtors, or real estate developers last I knew. Each of these things are a distraction from their business.
As far as people's credit records -- there's going to have to be a groundswell of change in the way we track credit and penalize people for having troubled credit at some point in the future. I won't be surprised to see new credit-scrubbing or guaranteeing industries evolve.
What's this? A common sense alternative approach that doesn't involve letting people hang out to dry? That doesn't involve open contemptuousness of those who are suffering the most? That's not a gimmick?
Dare I say it - that seems FAIR?
Careful, you just may lend the libertarian mindset (yes I'll even drop the usually earned glib prefix for this) a hint of seriousness and respectability.
For the record - I'd support this plan.
NO BLACK MARK ON THE CREDIT RECORD????
Megan's solution is to introduce fraudulent information into the credit markets, thereby distorting price signals even further. It also introduces more moral hazard. I keep saying this and I will continue to do so:
There is no "correct" central plan that will work because central planning does not work.
"The banks were idiots too, but don't pass the buck when you also signed the document."
The banks were idiots because they could securitize the loans, and (hopefully) sell them off to investors. Everyone messed up, but if the banks would have did their due dilligence in checking debt ratios and properly assessing risk, this wouldn't have happened.
I have to agree with Bearded Spock, sam, and Silas Barta Re: No black mark on the credit record. Do you have some sort of reasoning behind it or was it just a throwaway comment? Because if someone is just able to walk away scott free from their bills with no penalty, that’s hardly a case where “everyone loses something.”
Are you responsible for your neighbor’s bad decisions?
http://pacificgatepost.blogspot.com/2009/02/obama-mitigating-mortgage-foreclosures.html
Obama and Congress appear to think so. Is there any common sense in this program?
@James Raider
Look, no matter how responsible you were, if the rest of the nation is allowed to go down the tubes, or even if just if many of the other houses in your neighborhood go into foreclosure, they'll be taking you down with them. Or do you want to be sucked down into the black hole of default with your less responsible neighbors?
Assuming they are less responsible, and weren't just laid off as a result of the continuing economic troubles.
If I buy a house at 10% down, then get unexpectedly laid off 6 months later and end up taking a lower paying job (meanwhile, housing values have dropped 15%, leaving me underwater), was I irresponsible for taking a loan that I could easily pay before I was laid off? Is the bank irresponsible for making the loan?
Are you irresponsible for living next door to me, when your house declines in value?
Maybe the Obama plan isn't the best one for getting a floor under housing prices, but it is, at least, a plan.
Policies like Megan's are proposed to address specific problems created by earlier policies. Of course the new policies have unintended consequences than future policies will need to fix, as so it goes until the whole thing collapses like the Soviet Union.
What we need is freedom from these meddlers. They just can't seem to accept the possibility that the world could function without their guidance and control. Scratch a moderate libertarian and you will find a statist every time. Alan Greenspan is the example du jour. The one-time crony of Ayn Rand is calling for nationalization of the Banks.
So, while the banks were responding to the incentives created by Freddie and Fanny, Freddie and Fanny were also responding to incentives. The bank's incentives were financial. Freddie and Fanny's incentives were political.
Maybe the Obama plan isn't the best one for getting a floor under housing prices, but it is, at least, a plan.
Well, it's part of a plan, anyway. Which is more than we can say about the bank-rescue -- notion? suggestion? outline?
Unfortunately, until the bank problem is addressed, you can't fix the housing problem. And a fixed banking system is likely to be different, in ways that will change how you are able to address free-falling house prices and runaway mortgage delinquencies. Thus, the current housing part-of-a-plan will go on the scrap-heap anyway.
"Yes and no. Freddie and Fanny had a large appetite for non-traditional loans. Banks were simply responding to the demands of their largest customers."
Fannie and Freddie certainly contributed, but the private issuers REALLY spread the fire.
In a three-year span from 2003-2006, private companies such as Lehman Brothers, Goldman Sachs, and Merrill Lynch, raised their market share of new issuances of MBSs from 24% to 57%.
http://www.imf.org/external/pubs/ft/fandd/2007/12/dodd.htm
This dovetails with the other key shift in which the share of private issued MBSs, backed by subprime or Alt-A loans, increased from 47% to 71% from 1996 to 2006.
http://www.chicagofed.org/publications/fedletter/cflnovember2007_244.pdf
1. The no black mark on the credit report may be a viable option, especially if the gov't eases the pain by providing the mortgage holder some money.
2. I thought Bush had already proposed the 'no tax on forgiven debt' idea and saw it implemented. Yes it's not bad but I'm not sure it would make much of a difference in the long run.
As for 'greedy people' making this problem. The problem is that the financial system is spooked. Bubbles have popped before without taking out the entire economy with them. What's interesting about this proposal is that it does NOT impact the really greedy. 105% loan to value is not someone who purchased a house at a wildly inflated value. It's someone who purchased a house at a reasonable value that is now underwater because a once in a century explosion has sliced into the value of just about everything.
To me the plan seems to address the marginal foreclosure. It takes the person who might be on the edge of giving up, stop making the mortgage payments because there's no point, and says give it another chance. Hopefully if things turn around in a few years what was 105% loan to value might be a more reasonable 95% and the person can then sell in a healthier market rather than add to the panic today.
On the cost side, what hasn't been addressed yet is the fact that if you do have a few million people avoid foreclosure for at least a few years (or are able to sell in a few years and pay off their mortgage rather than a foreclosure today that hits everyone with a loss) what will be the impact on those numerous mortgage backed securities that we now either own or are indirectly underwriting? Clearly fewer losses there will increase their value and even if that is only a few pennies on the dollar it should be netted into whatever cost estimate is being made.
No black mark on the credit report is a horrible idea. The idea of credit reports is to allow lenders to accurately price risk - which hasn't worked too well so far, but would be even worse if very important information like a foreclosure is left off their credit reports.
And the end result will be that since banks don't know if you have a clean report because you had a default that's not shown or because you are responsible, they will assume everyone is a deadbeat and everyone will pay deadbeat rates for their loans - punishing those who are responsible.
In a three-year span from 2003-2006, private companies such as Lehman Brothers, Goldman Sachs, and Merrill Lynch, raised their market share of new issuances of MBSs from 24% to 57%.
I remember that there's a graph out there that illustrates this perfectly. Throughout 2003-2006 it shows Fannie and Freddie market share dropping like a rock. Fannie and Freddie did not participate nearly as much as private businesses through the worst of the bubbles. This was mostly because regulations prevented them from taking on such risky loans.
The problem isn't that foreclosures are too hard.
The problem is the house won't sell for the amount owed on the loan and banks don't want to recognize losses (for fear of being recognized as insolvent).
Someone is going to recognize the loss sooner or later. It will either be the owner that is willing and able to continue making payments, the bank who receives the keys in the mail or split if the parties mutually agree to renegotiate the loan.
My bailout/stimulus/housing plan would be to fully fund the FDIC while forcing banks to exclude non-performing loans/property from their balance sheets that are older than 60 days (with the theory being, if you can't unload it in 2 months, we'll do it for you). Those that are insolvent would have their assets seized. The houses for the non-performing loans would be foreclosed if they weren't already.
The inventory of houses would be auctioned off publicly with no reserve price (getting the auction logistics in place would occur before any other part of the plan to ensure an orderly transition). Whatever revenue is generated would be used to help repay taxpayers and depositors.
Shareholders would be fully wiped out and depositors partially wiped out above the 200k guaranteed.
Economically speaking, I don't like what Obama's done and agree with Megan on most things. But, this program actually looks ok to me, if we correctly understand what it's supposed to accomplish (which frankly I'm not too sure of myself).
Ie, it's not going to do a huge amount to prop up the whole housing market, nor fix the balance sheets of the lenders.
But for the marginal cases of strapped homeowners who almost kinda sorta can afford their payments, we can get them over hill by reducing their interest liability. Emphasis on marginal: the no-hopers are atill stuck. Unless I'm missing something here, the wealth transfer is subtle here: it benefits the marginal homeowners at the expense of the more solid ones who still have to pay market interest rates.
I don't see how this hurts the lenders. It gets rid of the marginal lenders off their books. They ought to want that, because even if the debtors are current now, they might not be in the near future. They can still foreclose on the bad debtors if they want, but the transaction costs of that are very high, it's probably worth it to take whatever the government incentives are.
The main benefit, that I see it, is that for certain concentrated exurbs, like parts of Phoenix or Riverside, CA, we might be in danger of whole neighborhoods turning into ghost towns with a huge wealth destruction following. With this we can keep the social fabric of those places more or less intact.
As compared to a lot of economic crisis measures up and down the world, this housing bailout ain't all that bad.
First, it is a worked through plan. That puts it ahead of Paulson's TARP, of Geithner's latest aids to the banks, and of at least half a hundred measures in one country or another.
Second, its core is a modest widening of the circumstances in which it pays a lender to renegotiate a mortgage loan. To do that, it limits routine help to a defined class of borrowers. In that class, lenders will be able to renegotiate free of the fear of sending a signal to other borrowers that the lender is going soft. Then it subsidises and incentivises renegotiation; it does not force it. Lastly it limits the types of renegotiation which get help; so keeping the administration manageable.
The rest is, effectively, trimmings.
The core helps lenders by cutting the net foreclosure plus renegotiation costs they face; and by improving the chances of properly pricing some of the better slices of toxic mortgage securities.
The plan will have little effect on house prices in the short run. Massive overhangs of property for sale in most areas will continue to force prices down. It may well dampen the downward overshoot of prices below historic levels of relation to rentals and to incomes, but it will not prevent that expected overshoot.
Overall, it is a fair installment on rational government action to restore functioning reasonably free markets in mortgages. Because it only tackles the mangeable part of the problem, its cost should be be well below the headline figures. If it does that and takes the political heat off doing something damn stupid in the housing market, we should be relieved. Being happy with the policy is another matter: is there any crisis option we can be really happy with?
Koz-
It appears to me that housing is still significantly (10-20%) overpriced. This plan shifts all future losses from the lender who made the bad loan to the taxpayer. I am against any plan that shifts the losses from those who made the mistake and are currently in position to take the loss, to the taxpayer.
If the concern is the effect of the inevitable bank failures on pension funds, use the billions if not trillions of dollars we are wasting bailing out the bad actors to recapitalize the pension funds after the losses have been realized.
I'd be really amused to see the stats on the homewowners that will qualify for these programs to begin with.
I suspect that we'd see that the majority of those who do qualify for this program are already being helped by the "stimulus" package, with this package on top of that.
I'd also like to see the amount of the relief monies that are actually dispersed vs. being eaten up by administrative overhead...
"It appears to me that housing is still significantly (10-20%) overpriced. This plan shifts all future losses from the lender who made the bad loan to the taxpayer. I am against any plan that shifts the losses from those who made the mistake and are currently in position to take the loss, to the taxpayer."
That might happen, but it also increases the chance that equity drop will be paid by the party who ultimately "ought" to pay it, the homeowner/borrower. Jingle mail is still a viable option for those who get really stuck, but anybody who's only 5-10-15% under water is more likely to stick it out if they can get a break on the interest.
Deed in lieu of foreclosure. It's a process that already exists. But it has to be voluntary.
http://en.wikipedia.org/wiki/Deed_in_lieu_of_foreclosure
HUD page on it:
http://www.hud.gov/offices/hsg/sfh/nsc/rep/dilfact.pdf
Btw, where does the "cramdown" fit in this? I've heard it mentioned wrt the Obama plan, but if I understand correctly the sorts of things Megan has been talking about require a statutory change which I haven't heard occurring. And also from what I understand, most of the Obama plan doesn't require Congressional approval.
A $275 billion dollar plan is a "modest one"?
Simply, wow.
"No black mark on the credit report is a horrible idea. The idea of credit reports is to allow lenders to accurately price risk -..."
The question is how much does the 'black mark' here guage risk. If the last year or so has demonstrated anything it's that we should be very suspect of the risk scoring system the financial markets have created.
"Unless I'm missing something here, the wealth transfer is subtle here: it benefits the marginal homeowners at the expense of the more solid ones who still have to pay market interest rates."
Not quite, it benefits marginal homeowners at eventual taxpayer expense. Solid mortgage holders have their interest rates locked in. Maybe it might hurt new home buyers indirectly if it causes banks to raise interest rates but we already have rock bottom interest rates which benefits new home buyers who are solid or solid mortgage holders who want to refinance.
The governemnt had to do something on this Housing mess.
Got a better idea...Send it to them.
Boonton,
You're 100% correct:
"The question is how much does the 'black mark' here guage risk. If the last year or so has demonstrated anything it's that we should be very suspect of the risk scoring system the financial markets have created. "
What is going to happen is a lot more human intervention in the awarding of credit. What the FICO score allowed was companies to automate the awarding of credit. If you filled out a Banna Republic application or a car loan app etc. the computer would look up your credit score see it was 620+ and give you the card of the loan. Now, they are going to have to have some human intervention.
A human will need to review your credit history and see if it makes sense to offer you credit. It could very well make sense to do it. If someone was barely making their 3500 a month mortgage payments and was foreclosed and they are now living in a 1000 a month apartment, they've gone from a terrible credit risk to a fine credit risk.
Inside MBS & ABS has the chart. F & F's market shares in MBS/ABS markets were below 50% in 2005, 2006, and 2007, when most of these toxic loans were underwritten. This sh*t was being bought non-GSE investors on Wall Street. These facts, however, are inconvenient for those who want to blame the CRA, F & F, and Barney Frank.
The asset bubble was created by Greenspan, who kept interest rates too low for too long (perhaps hoping the Republicans would win in 2006) and who was unconcerned by the dramatic decline in lending standards among mortgage bankers (who generated most of this trash).
Boonton,
Actually now that I think about it. The goal of the FICO score is to predict how likely you are to repay your debts. If Fair Issac runs the numbers and people who stayed current on their bills but have a foreclosure on their record are no more likely than others to default, then the foreclosure may no longer cause a significant reduction in your FICO score.
Megan's suggestion already exists in many states. It's often called a "voluntary foreclosure" or a "deed in lieu of foreclosure". The parties can voluntarily do this. However, there are third parties that can put a crimp in these plans. Other parties may have mortgages, judgments or other liens on the property. State real property law is going to control this and no federal legistlation is going to abrogate those real property rights. So this is only a "real" possibility in a finite number of cases: (1) both the lender and borrower have to be motivated to do it; and (b) there aren't any other liens on the property or creditors that could object.
Savage View,
There are many entities that bear responsibility, but you cannot excuse the GSEs in this debacle. They were front and center at the eye of this storm. This is in fact the reason they went down in August- they had too many/much of the toxic assets (they still do, and they are being used to aggregate even more of it since their balance sheets continue to expand).
People are wondering where the bad bank is going to be- I propose that the bad bank already exists and it is called Fannie Mac. The only question is what mechanisms are going to used to shuffle all the toxic waste into it.
"There are many entities that bear responsibility, but you cannot excuse the GSEs in this debacle. They were front and center at the eye of this storm. "
Except that the numbers indicate they weren't.
"People are wondering where the bad bank is going to be- I propose that the bad bank already exists and it is called Fannie Mac. "
So like is Citi and BoA the 'super bad bank'?
Also it helps to ask why Fannie/Freddie's market share went down. It went down because in the old world of making and selling toxic assets they were too boring. They wouldn't buy mortgages for homes over their 'cap'. They wouldn't buy exotic mortgages like negative equity, giant balloons, 'pick your own payment' etc. Even more the other big boys wanted the 'toxic assets' for themselves. By taking 1000 crap mortgages, slicing them into pieces and putting them back together they could create an asset that S&P was willing to call top quality. When the good times were rolling the Citi's, the Merril's, and so on could boast that they were holding ultra-safe assets that were paying above market returns. Why would they want to give them to Fannie?
1. Who generated this sh*t?
2. Who bought this sh*t on secondary markets?
3. Who permitted 1 and blessed 2?
4. When did 1, 2, and 3 occur?
You have seratim the entities that bear responsibility. F/F was simply not buying I/O 5/1 ARMs in secondary markets or substantial amounts of the securities based on them in tertiary markets.
Of course, Yancey knows that if no one is blameless, no one can be blamed... especially if one can throw around phrases like Community Reinvestment Act and names like Barney Frank.
@ boonton
The question is how much does the 'black mark' here guage risk. If the last year or so has demonstrated anything it's that we should be very suspect of the risk scoring system the financial markets have created.
But the problem is that the risk scoring has been too much in favor of rewarding credit when it shouldn't be. Leaving off important information that demonstrates a lack of credit-worthiness can only make that worse.
RE: Black mark
Going through a big time waste because last Nov we did our part for the failing economy and bought a car.
Now I come to find out when I try to refinance our never delinquent 25% LTV ratio mortgage that the auto dealership's finance department never ran my cc for the down and tossed the whole thing to collections and my previously sterling credit rating is now too low to get 30 year money at 5%.
Apparently the fact that the dealership let me drive the car off the lot is not (not yet at least) proof that their finance department is the one who screwed up. This will cost me $130/month (there, no you know my how much I owe on my house) until I can get it straightened out.
I am trying to remain good-humored about the real estate collapse and the various schemes to keep what is apparently a bad (collective) situation from turning into a worse (collective) situation. All for one and one for all, we're all in this together, blah blah blah.
But this "no black mark" business might just be where I jump ship. I'm playing by the rules and not costing the rest of you spend thrifts a nickel, and what do I get? Hours on the phone with Experian et al, wasting my time when I could be wasting my own damn time commenting on blogs!
No "black mark" my ass!
I am *this* close to pulling the plug on the whole operation and going Water World on all you all. No more taxes from me, no more insurance premiums, no more subsidizing your recklessness and stupidity and laziness with my prudence, intelligence and hard work.
My stepson bought a BMW at a monthly rate with no relationship to his income, dropped his full coverage insurance to liability only and then wrecked it. After a heated discussion about his lack of responsibility I paid the car off to keep him out of bankruptcy. His credit record being so good he immediate bought another one on the same unsustainable terms. It only cost me another a $5k to pay the balance down enough for him to get rid of it when his brain started working 6 months later.
You need a job, you need a home, you need food, you may need a car, but nobody dies because they don't have credit. It's not that year anymore.
It's not like credit ratings are perfect records of someone's payment history to begin with. There's often stuff that could be on there that isn't, items that shouldn't be but are, and sometimes you can get black marks removed (even when they are accurate) with negotiation and/or good behavior. Not to mention that even major black marks (bankruptcy, foreclosure, etc) will fall off with enough time. As such, I'm not convinced that omitting foreclosures from credit reports is fraudulent.
As to whether or not it's a good idea, I'm not sure. I lean towards yes, since it would help get this whole mess over with by getting house prices lowered to where they should be, but it's true that there would be issues that would need to be dealt with.For example, what about people who have already been foreclosed on -- do they get the mark removed? Also, how would it account for people trying to take advantage of it just to get out of a house they no longer want? To use myself as an example, I would be very tempted to find a way to get out of my home this way, even though my mortgage is very reasonable and I'm having no trouble paying for it, because I would like to be able to move if given the opportunity.
Of course, the credit rating system is pretty much shot regardless of what happens.
Well, sure, that's a great proposal, but why not just reset everyone's credit score to 750? What makes "flippers" who got caught in bad deals merit special treatment when others who made mistakes, possibly in worse situations, have to deal with their "black marks."
How about we just declare a year of Jubilee?
In theory, at least, items that hurt your credit scores but have no relationship to your actual willingness & ability to pay should not count against you. If there are millions of people who are otherwise perfect but have a single 'sent in the keys' foreclosure they are going to start getting loans anyway....just as many people who have a bankruptcy get credit card offers less than a year later. In some ways both things lower the risks to auto and credit card lenders. The bankrupt person must wait 7 years before doing it again. The person who walked away from an underwater mortgage will have more of his paycheck freed up to handle a small credit card or car loan rather than tossing everything against a huge mortgage in a heroic effort to keep the house going come hell or high water.
Not sure if things are different here in Canada than in the USA, but we ran into a situation up here several years ago with a house in a mining town. When we moved, the house wasn't selling because, well, it was a mining town. We rented it out for a year but got to the point where we wanted to divest ourselves of the house. We checked with our lawyer, and he told us that, because it was a mortgage, not a loan, it was a contract with the bank. If we simply turned the house over to the bank, it would satisfy the contract terms and we could walk away with no black mark on our credit rating. We ended up selling it before it came to this, though, so I can't confirm that this is the way it would have worked out.
If the above is true, then this "bailout" is more to protect the banks than the people. If everyone who is even marginally close to foreclosure turns in their keys, the the banks could end up owning thousands of overvalued houses, which will drive things even deeper than they are already. I don't think that anyone wants to test those waters, so better do something than nothing.
We have always had Deed in Lieu, but the lenders need to be willing to accept it. More of them are getting intelligent enough to do so.
Item 1 (no tax of debt forgiveness) was something we had from October 2007 through the end of 2008. I thought it was a really sterling idea at the time, but lender and market experience leads me to believe I was mistaken. It was what opened the door to massive (temporary) increases in the available housing supply, massively lowering values. My area (San Diego) being on the bleeding edge of this whole mess, had pretty much worked through previously existing problems and the market was ripe for a recovery and some of the data seems to suggest that one had started - and then people who were struggling got their "GET OUT OF DEBT AND TAXES FREE" card.
I believe that a lessened tax rate (say 25% of normally due tax) but not complete forgiveness would be a measure worth trying, but the complete forgiveness motivated a lot of people who could have and should have seen it through to bail out, creating more problems for everyone else.
2) Regarding idea 2 (no black mark on credit record), even if the credit is unmarked, several questions on form 1003 (The federally mandated mortgage application form) will bring it to light on any future loan applications they may submit. Furthermore, this amounts to deceiving the system, and will set the stage for further problems on down the line.
If, however, all the people who lost their homes due to this get the standard treatment, that's a lot of folks and a lot of potential customers that lenders are going to make up their mind that they want a year or so down the line. They will create appropriate programs and demarcations and grades of treating the issue, thereby dealing with the problem and bringing these people back into the market. The ones who otherwise take care of their credit will be fine. They may pay a slightly higher rate than people who didn't have a short sale, foreclosure, or deed in lieu, but the lenders will decide they want them as borrowers nonetheless. The ones who don't will suffer appropriate penalties.
I don't know if anyone is still reading this thread, but this statement is bothering me:
"Everyone loses something, but no one loses a crippling amount, and there is no net transfer between two parties who are both in financial trouble"
In this plan, what exactly does the home borrower lose? They probably got a few free months in the house before they went into foreclosure. Right there I figure they get a significant benefit. Or is just the fact of moving considered a terrible thing to suffer through?