Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

A Response on Preventing Foreclosures | February 20, 2009

I’ve heard from a number of my friends, both liberal and conservative, who strongly oppose the Foreclosure Prevention plan proposed by the Obama administration. Their argument is two-fold. First, we should simply allow those homeowners to declare bankruptcy and liquidate their assets. Second, the government has no business bailing out unscrupulous companies and people who knowingly bought homes they couldn’t afford.

Answering the first argument properly would take a considerable amount of time and research that I simply don’t have at the moment (although I hope to address it at a later date). But I can address the second argument.

Of course we’d rather not be bailing out people who don’t deserve it. That goes without saying. However, there’s simply no way to get a precise read on who these people are without expending a ridiculous amount of resources. People need help now. This article in Bloomberg which details the rise in jumbo-loan defaults is a good starting point. Money quote:

“The biggest influence in rising delinquencies is related squarely to the economy rather than poor underwriting,” said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, New Jersey-based mortgage research firm. “We are apparently all suffering to some degree. It’s certainly more severe for some but still, it’s pretty much widespread.”

That’s the problem we’re in. Foreclosures are no longer happening to just to subprime borrowers, nor are they happening simply because lenders were greedy and wrote bad loans. They’re happening because the economy is tanking, people are getting laid off, and they can no longer afford to meet their payments. If this pattern continues, it will have devastating effects on our economy and will hinder our efforts to come out of this recession. America’s mayors make the case better than I could:

“The wave of foreclosures that has rippled across the U.S. has already battered some of our largest financial institutions, created ghost towns of once vibrant neighborhoods — and it’s not over yet,” the report said.

The biggest losses in economic activity are projected for some of the nation’s largest metropolitan areas. New York is expected to lose $10.4 billion in economic activity in 2008, followed by Los Angeles at $8.3 billion, Dallas and Washington at $4 billion each, and Chicago at $3.9 billion.

Keep in mind, this article was written in 2007, BEFORE the surge in foreclosures of 2008 and projected foreclosures of 2009.

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