The Better, Cheaper Mortgage FixHow to renegotiate all those bad loans at no cost to the taxpayerThe key to understanding our plan is that houses are worth more if kept or sold by their owners than if they are foreclosed on. Bankers tell us that when they foreclose on a house, it typically loses a great deal of value, as much as 30 percent to 50 percent. And this is on top of the loss that the house has already suffered because of the general economic downturn. This means that if you bought a house for $300,000 and today you can sell it for $240,000 but instead lose it to foreclosure, the house will eventually go for only $120,000 to $168,000. The reasons are well-known: Foreclosure can be a time-consuming process, and empty houses are difficult to maintain. Sometimes, they are taken over by squatters and vandalized. And one badly maintained house can bring down the block, leading to more underwater homeowners, more mortgage defaults, and more foreclosures.
If foreclosure is so costly, why don't lenders avoid this cost through renegotiation? Renegotiations aren't happening because so many mortgages are securitized. In the old days, if you wanted to renegotiate your loan, you just called your bank. Now you have to deal with the loan servicer, who acts on behalf of the thousands of mortgage-security holders who have a right to a share of your payment. The loan servicer gains little and loses a lot if it attempts to renegotiate a loan. Securities holders don't trust servicers and threaten to sue them if they renegotiate loans; servicers usually don't lose much money if the mortgage defaults.
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