Should we give the banks a haircut to jump-start the housing market?

Foreclosure

Perhaps there’s an alternative to this as a way to revive the housing market.

While the market for real estate in Philadelphia and nationwide has shown signs of slow but steady recovery since the bursting of the housing bubble in 2008, the housing market recovery is nowhere near as robust as it needs to be to power a general economic recovery.

One reason why: Homeowners remain over their heads in debt, and until that debt is cleared, many who might otherwise enter the market will remain on the sidelines. How to clear that debt has suddenly become a topic of conversation. Foreclosure, a relatively slow process, is right now the only method being used to reduce the debt overhang. Recently, though, a growing number of observers are calling for a faster method, but one that will be more painful for the lenders: Forgiveness.

That’s right – the banks should simply write off the debt as uncollectible, take the losses, forgive the debt and move on.

At a campaign stop in Florida recently, Republican presidential candidate  Mitt Romney actually broached the subject with struggling homeowners there:

¬†“We’re just so overleveraged, so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake, they loaned too much, we’re overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it’s worth.”

Similar calls for debt write-downs have been made by MSNBC commentator Dylan Ratigan. Forbes contributor E.J. Kain even went so far as to invoke a practice dating back to Biblical times – the declaration of a jubilee year in which all debts were forgiven and debtors released from their obligations – in calling for a general debt write-down in order to spark recovery.

The downside of a large-scale write-down of debt is that it will send some banks down the drain. That fear has so far kept bankers from even considering such a step. But one reason the recovery in the housing market – and the economy in general – has been relatively anemic is because the excess debt has not been dealt with expeditiously. Instead, as Romney noted, we have tried to prop up tottering banks by acting as if the debts were still worth something. If, instead, we took the losses and forgave the debt, we might see broader, faster and stronger recovery across the board – and nowhere more than in real estate. Of course, there will be short-term pain, just as there was when the Federal Reserve sent interest rates soaring in the early 1980s to wring the inflation out of the economy. But the gain afterwards will make that pain just a memory in short order.

–By Sandy Smith

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Posted by Noah Ostroff on January 25th, 2012
Filed under: Articles,Buying a Home,Foreclosures,Market stats,Mortgages,Philadelphia real estate,Selling your home
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