Is Foreclosure the Solution?

Ramsey Su has a novel fix for America's housing woes: No fix at all! Instead, he says that a wave of foreclosures is the best option.

For homeowners, says Su, going through foreclosure is a great way to solve both solvency and liquidity problems overnight: your liabilities no longer exceed your assets, and your cashflow is improved by not spending a huge proportion of your income on mortgage payments.

For the credit markets, foreclosure neatly cuts through the Gordian knot of conflicting incentives between various tranches of mortgage-backed securities: "It wipes the slate clean," he says.

As for the alternative, Su writes:

Loan modification is not only ineffective, it is evil. Coercing borrowers to continue paying a mortgage on a home that is hopelessly overvalued and not informing them of alternatives is predatory lending.
The media should interview those who had been foreclosed upon. Do they feel sorry or relieved? Are they rebuilding their credit, not to mention their lives? Do they miss the pressure of having to make payments they cannot afford on a McMansion that belongs to the lender?
The intent of modification programs to date is to create a generation of mortgage slaves. Fortunately, mortgage slaves can free themselves via foreclosure, and the masses are choosing to do so.

If nothing else, Su's suggestion that the media should do some serious investigation into those who have been foreclosed upon is a great one. A huge part of the current policy debate over housing is predicated on the knee-jerk assumption that being foreclosed upon is always and everywhere a Bad Thing. That might be true, but it would be great if we could have at least some anecdotal evidence to that effect, if not actual empirical data. It's almost certainly true that very few people want to be foreclosed upon ex ante. But it's entirely possible that ex post, they think a little differently about it.

(HT: Carney)