Politics

"You're not stabilizing the market. You're creating more chaos."

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It's only taken six years to learn, but the lesson may finally be sinking in: Public policy designed to keep bad borrowers in homes they don't want to pay for has been a disaster. 

One-of-a-kind house. Just needs TLC. Flexible zoning.

The newest mainstream media support for this heretical idea is Adam Geller's excellent AP article on the shadow inventory. In 3,400 words, the piece contains plenty of the unintentional comedy the great mortgage rescue has generated: a neighborhood full of abandoned homes without a single for-sale sign; a swanky Florida block of new two- and three-bedroom homes for which nobody's willing to pony up $100,000; a defaulted borrower who turned up his nose at a chance to sell his house for six times what he paid and now wants your sympathy because he hasn't made a mortgage payment in several years. 

But Geller admirably cuts through the baloney being put out by the FHA and the National Association of Realtors. That includes the biggest lie of all – that "we" can create an orderly housing recovery by concealing the depth of the problem: 

Each month, analysts issue reports detailing the number of homes nationwide in foreclosure or held by banks. The implication is that if we can just find a cure for these loans and homes—either by matching buyers with houses or helping the borrowers stay put—the economy will be able to heal at last.

At ground level, though, it's more complicated.

There are many different estimates of the size of the shadow inventory, most of them colored by the desires of the people making the estimates. Geller gets his highest estimate – 8.9 million to 10.4 million homes destined to go back on the market – from Amherst Securities analyst Laurie Goodman, a committed real estate interventionist who advocates trying "one modification plan after another until a plan is successful." (Weirdly, Goodman's own data argue against her modification ideas. She includes "homes with loans that are at least 60 days overdue, have been delinquent in the past and are likely to go into default again." Does she really think, after all those redefaults, there's some point at which loans like that will stop going bad?) At the lower end is CoreLogic, which puts the shadow inventory at 1.6 million homes. 

Geller's anecdotes certainly suggest the higher figure is closer to true. He takes readers on a Jim the Realtor-style tour of cruddy properties and comes up with pro-cyclical arguments from some surprising sources – including robo-signing whistleblower (and winner of a large cash settlement) Lynn Szymoniak, who notes that lenders are not putting their REO properties up for sale; and a former real estate agent turned abandoned-building babysitter who tells the reporter, "I go online and see what they're reporting and it's not the same…It's not going to be better for years…and the reason I say that is the truth is not out yet."

The takeaway here is something Reason readers have been aware of for years but that the establishment media have only recently begun to consider: The real scandal is that lenders are too slow to wrap up foreclosures. And by encouraging lenders to drag out the process, the Obama Administration has taken bad borrowers on a long and costly trip in a circle, instead of letting them go back into the rental market and get on with their lives. The bottom line comes from a West Palm Beach real estate agent named Frank Verna: 

"The truth of the matter is we would have already gotten over it if they just let the properties get out there and get sold," Verna says. "So what are you doing? You're not stabilizing the market. You're creating more chaos."