Banks are just encouraging bad behavior

Nothing brings home the insanity of the foreclosure crisis like watching water gush from the closed garage door of a vacant house.

The flooding rushed past my driveway and down the storm drain -- taking another chunk of my home's value with it.

The house was a rental purchased during the valley's housing boom. The landlord had stopped paying the mortgage, and when the lender took possession of the property, the tenants were tossed. A few weeks after the eviction, someone broke into the house, plugged the drains in the upstairs bathroom and turned on the water.

What had been a perfectly habitable structure is now a barely salvageable Superfund site with "no trespassing" signs. It's a neighborhood nightmare.

By going through the motions of foreclosure, the bank didn't just cement its losses, it worsened them.

Even when the economy showed signs of collapsing last year, I remained convinced the country's banks would, at some point, begin acting in their best interests. The existing home market already was suffering from oversupply. Surely, I thought, the profit motive would be enough to get banks to think outside the box, to find ways to maximize returns on their own investments.

Surely, I thought, banks would begin taking steps to not only prevent foreclosed homes from falling into disrepair, but to protect their best customers from slipping underwater on current mortgages through the devaluation caused by default sales.

Yet some banks still kick rent-paying tenants to the curb so properties can sit vacant for months, then be sold for tens of thousands of dollars below market value. They can't be troubled to pull a single weed or sand and repaint a single fascia board. They don't pay homeowner association dues on the foreclosed houses they can't sell. They make deals with mortgage delinquents who bought houses they couldn't afford with exotic financing, then tell the folks who pay their 30-year, fixed-rate loans on time every month to go pound sand.

It's a recipe for the worst solution of all: heavy-handed government intervention.

Over the past two weeks, Las Vegans have seen efforts at the state and federal levels to minimize the devastating effects of home foreclosures. At the Nevada Legislature, Assembly Speaker Barbara Buckley, D-Las Vegas, recommended requiring lenders to enter mediation with borrowers on potential mortgage modifications before putting a property in foreclosure. President Obama's plan, revealed Wednesday, goes further by subsidizing mortgage refinancing and modifications -- and not requiring that homeowners be delinquent on mortgage payments to get help. The president's debt-financed program would buy down interest rates and extend loan terms to cut distressed homeowners' mortgage payments.

Obama also supports more oppressive Democratic legislation that would allow bankruptcy judges to rewrite the terms of individual loans and "cram down" mortgages by reducing the principal owed.

All of these proposals would impose new expenses on lenders, increase the cost of borrowing and reduce the availability of credit in an already crummy economy.

But what did the banks expect? Politicians are more than happy to step in and address housing issues that businesses won't. In 2008, about two-thirds of all local resale closings were discounted foreclosures, which sank median existing home prices more than 30 percent for the year. The Center for Responsible Lending projects that more than 50,000 homes will be foreclosed statewide in 2009, a number that, if realized, will send home values tumbling even farther and perpetuate the vicious cycle of default.

Still, nearly every response advocated by government and undertaken by banks is reactionary and rewards dysfunction. Homeowners who've played by the rules and met their obligations are furious. They made down payments on their homes and have seen that equity vanish. They're following the terms of their mortgages by maintaining their homes. They're watching their neighbors, who put no money down on a house beyond their means, get better terms by skipping payments. Now their future tax dollars are going to subsidize the misguided rescues -- plus interest.

A few weeks ago, I received an offer from my lender to refinance my mortgage to a lower rate at no cost (assuming the bank can extract the loan from bundled securities). Irritated, I called the nice woman who handled my loan and confirmed that because the foreclosure wave has torpedoed my home's value, any refinance would force me to resume paying private mortgage insurance, if I could find any. And she begrudgingly acknowledged that I probably would need to be four months behind on my payments to be eligible for a loan modification.

I requested a loan modification form anyway. It asks, "What is the reason you are having trouble with your home loan payment?" How about bank and government incompetence?

If you encourage bad behavior, you get more of it. About half of the U.S. mortgages that were modified in early 2008 ended up re-defaulting.

I'm still waiting for someone in the banking industry to encourage the right behavior. Rather than modify loans to keep people in homes they can't afford, banks should downsize people into foreclosed properties that better suit their means. (Remember the concept of "entry-level" homes?) Instead of offering incentives for people to skip mortgage payments, they should offer rewards for people who make good on their contract. Make 23 mortgage payments, get the 24th free! And how about putting some of the valley's unemployed craftsmen to work fixing up blighted properties?

Some institutions finally appear to be paying attention, but they might be too late to save their industry from the legislative equivalent of a body-cavity search. A handful of companies are paying borrowers cash bribes to leave foreclosed homes without trashing the property. Several banks are observing foreclosure moratoriums. And a little more than a week ago, Freddie Mac announced it would allow renters to remain in properties seized from delinquent landlords, and that some borrowers would be permitted to rent and remain in the homes they've lost to foreclosure. It's an inexcusably late acknowledgement that vacancies, vandalism and neglect impose costs on everyone.

The political intervention is just beginning. Government has its own interests to protect. Which means things will only get worse from here.

Glenn Cook (gcook@reviewjournal.com) is a Review-Journal editorial writer.