|FDIC Chairman Sheila Bair|
NEW YORK ( TheStreet) -- Former Federal Deposit Insurance Corp. Chairman Sheila Bair made some excellent points in her Washington Post Op-ed piece Monday but overlooked one important point: The U.S. needs to double down on foreclosures. To the former regulator, forgiveness is the answer. Bair said that the banks had showed a "stubborn refusal to deal head-on with past-due and underwater mortgages," and that it was "time for banks and investors to write off uncollectible home equity loans and negotiate new terms with distressed mortgage borrowers that reflect today's lower property values."
True enough. But why should the banks automatically write off any second-mortgage or home equity line of credit that goes delinquent? If word were to get out, any borrower who was actually in a position to comfortably make their first mortgage payment, plus a payment on a second mortgage, would seriously consider a "strategic default." They wouldn't lose their homes under Bair's plan. Bair does place some blame on consumers, saying that leading into the credit crunch, "it became old-fashioned to save up for the down payment on that first home," and that "taking out a mortgage shifted from the most serious financial decision a family would make to a speculative bet on how far home prices would rise." No, ramping up writedowns isn't the only answer. Want to save the banking system and restart the housing market. Why not also step up foreclosures? Foreclosure has become a dirty word, but the regulatory onslaught has forced the largest banks to improve their loan servicing and foreclosure practices, and deals such as the recent $8.5 billion mortgage putback settlement by Bank of America ( BAC), actually spell-out myriad servicing, modification and foreclosure processing improvements. So this is the time for banks to really push the foreclosure process, and maybe regulators and the rest of Washington crew consider process reforms to speed foreclosures through the courts. Banks not only need to beef up their loan-modification efforts -- as Bair suggests -- but also greatly increase their mortgage foreclosure filings. Rather than taking a uniform approach, like Bair's brilliant write-off of any "uncollectable" second mortgage, the banks need to analyze each delinquent loan and make the decision that best services the bottom line. Either way, it enables them to move forward and clear out the volume, thus helping the overall housing as well.
Here's a quick rundown of the quality of modified mortgages at the "big four" U.S. banks. It may seem a bit tedious, at first, but the numbers clearly show that modification isn't always the answer.
Citigroup ( C) had $17.9 billion in delinquent one-to-four family mortgage loans on its balance sheet as of March 31. The company had $18.9 billion in modified one-to-fours, and of these, 30% had gone into default a second time. Bear in mind that these numbers only represent the loans actually on the banks' balance sheet. Bank of America alone was servicing $1.4 trillion in one-to-four family residential mortgages for others, as of March 31, and of that total, $96.9 billion were in some stage of foreclosure. -- Written by Philip van Doorn in Jupiter, Fla. To contact the writer, click here: Philip van Doorn. To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn. To submit a news tip, send an email to: email@example.com.