Monday, June 07, 2010

The Second Lien Problem

Again, this is yet another reason why allowing mortgages in bankruptcy proceedings would have been preferable. Obviously people who are staying in their homes without paying mortgages are at least temporarily not having such a bad time of it, but the system is just maintaining both fantasy housing and financial markets.

Foreclosing would require that the mortgage owners re-estimate downward the value of the second liens to what Morgenson calls "fantasy levels." That, in turn, would require them to admit that the loans had gone bad and, therefore, require that they repurchase the loans from Fannie Mae and Freddie Mac.

I imagine the grand thinking behind all of this, to the extent that it exists, is that if you just kick the problem down the road far enough a recovering economy will start to magically solve the problem. But the recovery isn't happening, so...