Suggestion for legislation

[Ben]

Seeing as though politicians want to look like they are solving the housing crisis, and that they will continue to want to legislate something, I want to have a stab at suggesting what they should do. Note that what I think they should do is nothing, but I want to have an idea that does the least harm.

I think that the government should announce a program to reduce the impact of foreclosure on the credit ratings of people for the next 2 years. It will probably constitute some kind of mortgage insurance for people to adjust their credit rating.

The advantage of doing this is that it allows the market to perform in a healthy fashion and foreclosures to go ahead, as well as letting the market adjust to the new environment with no funny money loans. In fact, it helps get people out of homes that they cannot afford because they will fear foreclosure less.

The way that it would work is that the government would pay PMI that shows the difference in risk of ignoring your last foreclosure. So if you had a CR of 550, and then a foreclosure, you would still have an effective CR of 550, not 750.

No doubt this would cost a bit because some people deserve the bad credit of their last foreclosure. But banks would still have to lend based on downpayment, DTI ratios and credit ratings that made sense.

Thoughts?

[rose-colored-coolaid]

No chance of that getting through. All current plans on the table have the opposite intentions. "Don't let the market revert!" they scream. What too many people really want is for their homes to keep artificial gains forever, and if this problem weren't so huge they would probably get it.

Also, the borrower really doesn't have much choice in the matter of being foreclosed upon, unless they can afford to pay and decide to walk away anyways. Your plan would actually encourage "just walk away", which would be very expensive.

[TheMightyQuinn]