Finally a lower cost way (from a taxpayer perspective) to keep many people in their homes and to prevent foreclosures. Lets start with the only two reasons for foreclosure:
- You can’t afford your house.
- You can afford your house but choose not to (e.g. because its “under water”).
The thing is that there is a big difference between the two. The first are unlucky or irresponsible. The latter are engaging in common extortion by threatening to help trash the economy if they don’t get paid off through debt restructuring (even though they can afford their homes without help). Simply put they are real estate terrorists and we shouldn’t negotiate with terrorists
So how do you differentiate the between the two? Very simple, instead of using a carrot (restructurings) to keep #2 in their houses use a stick (more severe penalties for leaving). Carrots are expensive and we all have to pay for them, sticks are cheap and don’t cost taxpayers a dime.
Foreclosures look bad on your record but we should make them look worse than if you declare bankruptcy. If you abandon your house we should double the time it stays on your credit report, put a lien on any future tax refunds that then gets paid into a foreclosure fund to pay banks at least part of the debt lost from those who abandoned their houses (that might also help relieve the negative downward pressure on banks’ desire to lend). Even tax, as income, the amount left behind on the loan as if it were a forgiven loan. Oh, I’m open to other punishments from people who know better.
Now what about those that truly can’t afford their homes, should they be punished as severely? Well they can be offered a trade-off. Simply put if you declare bankruptcy (which if you are truly under financial water is a viable option) you don’t suffer the enhanced punishment for those who don’t declare bankruptcy. As stated above this may even be a better option with less severe penalties. Granted there are still penalties but now bankruptcy is the more attractive option.
Why favor bankruptcy as opposed to foreclosure out of bankruptcy? In bankruptcy you have to report to a bankruptcy judge that helps you make the tough decisions to become financially solvent again and the burden is on you. In bankruptcy you learn how to get back on your feet and stay on them. If you just walk away from your house in a standard abandonment you learn nothing, the burden is mostly on others, and may very well find yourself in this situation again (and so will all those around you who pay to bail you out).
So now you have a choice. If you are truly bankrupt you declare bankruptcy. If you aren’t you may have to think twice about walking away because you either face even more severe penalities than you would have in bankruptcy. You certainly won’t declare bankruptcy because well, uh, you’re not really bankrupt. You’ll just have to stay in that house and tough it out at no cost to the taxpayer. Oh and we just prevented a foreclosure.
(Make sure to email the Treasury Secretary Timothy Geithner to make sure he doesn’t negotiate with Terrorists)
