Foreclosure Fiasco

(MoneyWatch)  According to a CBS News poll, most Americans believe that the worst of the housing crisis is over. I sure hope that's the case, but the numbers look grim. The New York Times cites data from First American CoreLogic that showed that almost 4.5 million homeowners were upside down on their mortgages, "with their home value dropping before 75 percent pf the mortgage balance."

Increasingly, these homeowners are considering walking away from their obligations, even if they can actually afford the monthly payments. These so-called "strategic foreclosures" have come under fire from moralists and lenders, but as the NY Times found, many of the underwater borrowers are "beginning to feel like suckers," and ask themselves "Why not let it go in default and rent a better place for less?" The traditional answer has been that walking away trashes your credit score, but many homeowners are willing to make the trade.

The foreclosure mess will continue to wreak havoc on the housing market, which brings us to the cure: (1) lenders must ultimately lop off principal balances and (2) the bar should remain high to purchase a home. I know people don't like either solution, but the first will clear out the mess quickly and the second will prevent future foreclosure fiascoes.

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