Caffeinated Simpleton

Foreclosures will Freeze Themselves (if you let them)

There has been a lot of debate in the past few months about what the government should do about all these "toxic assets" that various financial institutions have on their books. My less than educated opinion is that it doesn't matter, but the government has to make its intentions clear, and it has to make them clear fast.

These "toxic assets", which are largely comprised of bad mortgages to people who will never be able to pay them back, have an undefined value. Nobody is really sure how much they are worth, if they're worth anything at all. Once people realized that these assets were of questionable value, and certainly worth a lot less than previously thought, the total value of the financial institution plummets down. This is an overly simplified version of what makes these institutions "insolvent".

The customary thing for a bank to do when a mortgage cannot be paid back is to foreclose on the home. This allows the bank to sell it for something close to its actual value and recoup the money they lost on the bad loan. This is what happened en mass at the beginning of the financial crisis. However, it's my belief that this is only continuing because of governmental indecision.

Houses are as close to worthless now as they have been in anybody's lifetime. We suddenly find ourselves in a situation where there are far more houses than there are people with the means to purchase them. This means that foreclosure no longer makes sense. If a bank cannot sell the property they foreclose on, then it is in their best interest, by far, to renegotiate the mortgage. In many cases, the people most willing to pay for a house are the people who don't want to lose their home, and they'll pay what they can.

The government sees this, of course, which is why they want to help. By purchasing all these bad assets, or so the argument goes, they can get what value is there without throwing people out on the streets. However, they have not made their intentions clear. The government's failure to do something or say that they will not do anything is the single worst thing they could do. As it is now, financial institutions have no incentive to renegotiate mortgages because there is a sporting chance they will get a better deal from the government. If the bad mortgages look worthless, so much the better, the government has to act to save these institutions that appear insolvent and are "too big to fail", and the government will look at those "worthless" assets, see that they are not worthless, and see a potential money making opportunity (especially after the savings and loan crisis). In essence, the financial institutions can't lose, as long as they keep these toxic assets looking worthless.

I have my personal opinions about what the government should do, but anything is better than straddling the fence, debating whether or not to do something or not. These institutions will be forced to work out their problems, or they will have them taken off their hands. Either outcome is preferable to the current  predicament of millions of people in default. This isn't the banks' fault, it's the government's, and it's crucial that they do something about it.

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