Foreclosure crisis hurts us all

I have a friend here in Carson City who will soon be losing her home. She's not the first, and probably not the last.

She bought her house back near the height of the boom. It's a fairly small, modest home, but fits her needs almost perfectly. At the time, her income from her sales job easily covered her mortgage and expenses. Times were good.

When the boom went bust, so did a big chunk of my friend's income. At the same time, the value of her biggest investment — her home — fell by more than half. She tried to take advantage of the available mortgage modification programs to no avail. She owes more than $200,000 on the home, which the bank is now attempting to sell for $90,000, with no buyers yet.

The sad part of this story is that it doesn't have to be this way. Instead of selling the home for $90,000, the bank could just reduce the principal on my friend's mortgage down to, say, $110,000, which would allow her to keep the home. The bank would win because they would have a paying asset worth more than what they will get by selling the home. My friend wins because she would get to stay.

The other winner would be all of us who own property in this city. Dumping all of these foreclosure properties on the market greatly depresses home prices, which hurts us all. Falling prices push more people into foreclosure, continuing the downward cycle. With home prices dropping, few want to invest in buying homes until the market hits bottom.

Keeping these homes off the market and in the hands of the current owners is something that would benefit all of us.

The banks that foreclose on these properties are losing the principal owed on these loans anyway. Why don't they just write them off? Part of the problem is the same short-term, profit-at-any-cost thinking that led the big Wall Street banks to make those horribly bad investment decisions that played a leading role in the financial crash in 2008.

But another major stumbling block is that the government needs to jump in and get all the banks on board to make this happen. Without coordination between the banks, mortgage modification programs like this don't work. Here's a case where government could have a very positive role that helps all parties in the long run.

Too bad, because our government today is broken. Instead of doing what needs to be done, you have both parties arguing over ideology and positioning themselves for the next election. In particular, the increasingly radical Republican Party — backed by the Wall Street banks who profit from the current system — is fighting all efforts at reform. At the same time, you also have enough Wall Street money flowing to Red-State Democrats to cause the wheels of government to grind to a halt.

That's just fine for those banks and corporations who are pulling in record profits in the middle of the economic chaos the rest of us are dealing with. A non-working government lets them keep playing the same rigged game at our expense.

There are those who talk about indebted homeowners taking responsibility for their bad decisions, about not wanting to reward failure and punish success, about reducing the size and cost of government. However, too many of these same people are the ones who go running to the government for bailouts for their own bad decisions, lobby for special treatment not available to the rest of us, or make their living feeding off government contracts. They go off sailing in their luxury yachts, leaving the rest of us to drown in the depths of their hypocrisy.

Rewarding individual success is a hallmark of the American economy. But as we have seen, individual failures can cause great collateral damage. When houses on your street goes into foreclosure, it hurts everyone in that neighborhood, with the damage extending to the city, the state and the country as a whole. Their failure is your failure, and our failure, too.

You may know better than to bundle crappy subprime mortgages together and classify it as a safe, AAA investment-grade security. But you can get hurt when a bunch of Wall Street whiz kids get paid big bucks to pull the same trick.

Ben Franklin is famous for saying "We must, indeed, all hang together, or assuredly we shall all hang separately." He said this in the context of the Founding Fathers maintaining their solidarity against the invading British army during the American Revolution. Certainly, there were some founders who could have profited from not hanging together, by selling out the revolution. Instead, they put personal gain aside to help their neighbors and their country.

This country was founded not just on individual freedom, but also collective action to serve the needs of the common good. One of those needs at this time is to keep people like my friend from getting booted from her home, only to see that property dumped on an already burgeoning real estate market, to the detriment of us all.

We have the ability to fix this problem, as well as the other problems with our economy. We just need the will to get it done.

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(photo by Jeff Turner)