Foreclosure Mitigation Efforts

The IMF  has released a ‘staff note’ on how do foreclosure mitigation: you can read it  here.   While the focus is the US, it is a general primer that is also relevant to Ireland.

2 replies on “Foreclosure Mitigation Efforts”

This paper correctly identifies the root cause of the residential mortgage (and by extension financial) crisis as being endogeneity in the demand function for houses and the supply of secured mortgages.

Disappointingly, the paper does not follow this up with a suggestion of how to treat this endogeneity. Thus, no mention is made of mark-to-market asset valuation practices. It is these (false) market valuations which allow sticky prices in residential property markets to clot into asset price bubbles. A CAPM model is needed to correctly price assets acting as securities for loans.

In the absence of this, even sound banking regulation will not insulate markets from the risks of asset bubbles. You can stipulate any LTV you like, but if this market V is continuously appreciating at a rate faster than the NPV, the market will always be heading towards a negative-equity crisis point.

More generally, I perceive a widespread unwillingness to accept that a radical revaluation of these asset prices is not only necessary, but also a valuable tool in restoring competitiveness to the economy.

The idea that the pendulum might swing too far the other way is all well and good, but in practice I think this boils down to an attempt by land owners to shore up their asset values at the expense of the taxpayer. For instance, the IMF paper states that foreclosures should be avoided because they are costly. Perhaps then the solution is to make them less costly?

This is also a huge intergenerational wealth transfer issue – sustaining false property values allows older, less productive economic agents to squeeze wealth out of younger, more productive ones.

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