Foreclosure has become a very dirty word. It is in the pantheon of recessionary smut with “short-selling” and “sub-prime” and only slightly better than the dreaded B-word, which the tabloid press increasingly deploy as the financial equivalent of pervert; “BONUS BANKER PREYED ON BORROWERS.”
Fuelling the problem is the gratuitous spree that banks have gone on in separating delinquent borrowers from their homes. In the US alone, there are enough “shadow inventory” homes to meet the entire market demand for almost two years. UK and European banks, while slightly more reserved, have also got in on the act, clawing back whole cities worth of cul-de-sacs in a desperate bid to pare their losses. This, understandably, has upset a lot of people.
Politicians are outraged at the “scale of the problem”. Homeowners are panicked. And, cheerleading the cause for the outraged masses, are three actors from the US television show The Sopranos.
The actors, who appear as confusing three-way amalgamations of onscreen character, real person and gun-for-hire advert player, take it in turns to bowl up to the camera and discuss their fears and, crucially, what can be done to “whack” these bankers.
“Hey, you know me as a tough guy, eh? But I am not tough enough for this, eh,” one explains. But the solution is quickly struck upon. The man who plays “Big Pussy” in the show concludes that, “if you are that person [a homeowner], you don’t need a wise guy, a tough guy. You need a smart guy, you need the right guy.”
The right smart guys, it turns out, are the Foreclosure Institute – the self-proclaimed truth-tellers about foreclosure. In reality, the campaign group’s website feels less like a solution than the recruitment page for a concerned homeowners’ cult.
But let’s return to those angry politicians.
Their rage tends to centre around two key points. Firstly, that bankers have behaved badly in lending, without having done due diligence, to borrowers for whom repayment turns out to be a problem. Secondly, that those bankers have compounded their badness by seizing the assets against which loans were secured in a greedy and economically damaging manner.
Fortunately, for the sake of having a fair and open argument, governments have provided us with their own example of how to handle a delinquent borrower: Greece.
Greece has not been foreclosed on, nor, under the laws of sovereign lending, can it be. Instead, the country in which modern democracy was spawned is being propped up by a steady drip-feed of loans from its European neighbours.
The problem is it doesn’t work. Rather than allowing Greece to maintain the status quo, the handouts only postpone inevitable default while allowing the situation to worsen – an already eye-wateringly high debt to GDP ratio of 130 per cent in 2009 is expected to hit 166 per cent by the end of this year. By allowing Greece to struggle on rather than default, take the pain and start anew, the governments of Europe have helped ensure the country’s economic redemption will be a long and tortuous odyssey.
So, for all that governments criticise the banks, their alternative is hardly a solution. Applying the governments’ approach to the relationship between banks and their mortgage borrowers would produce a grim Frankensteinian finance.
Zombie homeowners would be forced to jump through an ever-shrinking hoop of austerity measures just to keep the bank happy. One can imagine the monthly conversation between bank and borrower: “We will allow you to forego the money you owe us this month as long as you promise to run the heating for only one hour a week and pay us back from the energy savings. The lights must also remain off for all but essential bathroom activities.”
Equally, imagine a Greece where the different creditor governments were free to seize assets to make up for their losses.
The French and Germans, with first dibbing rights, would be quick to toll all the roads before dividing up the islands between themselves. Britain, Italy and Spain would turn their patches into giant holiday camps where tourists could mix archaeology with intoxication, while the landlocked trio of Austria, Hungary and Luxembourg would scrap it out for the finest cuts of Aegean coastline. The Acropolis would be sold off to private equity investors.
In reality, neither the banks’ guillotine approach nor the slow strangulation of government lending is a perfect solution for what to do with a borrower who can’t play ball.
Doomsayers of the future will use “foreclosure” as one of the terms to remind us about how bad things were last time. It would, I suggest, be worth them adding “bail-out” to their list of economic profanities.
Ed Hammond is the FT’s property correspondent
More columns online at www.ft.com/perspective