Maryland's Plan for the "Mortgage Crisis"

Today Maryland Governor Martin O'Malley (D) called for an "emergency work-session" with mortgage lenders to "help find solutions to the foreclosure crisis." The call included a laundry list of ideas to "help middle class families:"

• new emergency regulations requiring reports from mortgage loan servicers detailing their efforts to help homeowners facing default and foreclosure, which for those playing at home means that the new regulations are not subject to the standard notice and comment period required when regulations are issued--they are issued as is without any thought or justificaion.
• lenders will be required to give the state a list of homeowners with adjustable rate mortgages (yet another piece of information that is not something I need the government to have)
• creates a zero percent interest bridge loan program to help people facing foreclosure to stave off the foreclosure (adding to that family's debt--how exactly is that helpful???)
• and "sweeping reforms proposed for the mortgage industry, including raising the bar for licensing, tightening lending standards and eliminating defective products from the market in Maryland." (and thereby making it more difficult to get a loan)

If this is O'Malley's definition of help, I'd rather take my chances with the mortgage lender--at least they have a vested interest in getting paid and therefore are predictable in their actions.

The bridge loan program in particular strikes me as a stupid idea. No matter what, even with the zero percent interest rate, any bridge loan is adding to the debt burden and thus the financial woes of a recipient. If they didn't have financial problems, they would not be in a position of facing foreclosure. Again, how is this helping in the long run.

One of three things is going to happen with people who receive these loans.

1. The debtor will be able to get back on their feet and get their finances cleaned up, thus repaying the bridge loan and/or their regular mortgage. I suspect this will happen in less than a quarter of the cases, and probably less than ten percent--but again that is a guess.
2. The recipient will not be able to get out of foreclosure trouble in the long run and their house will be foreclosed upon. All the bridge loan did was stave off the inevitable for a couple more months. The reasons are likely many, but the crux of it will be they have more house than they can afford and/or more debt than they can service.
3. The recipient will be unable to stay in their house, default on the loan, get foreclosed on and also not be able to repay the state. In this case, the debt is either written off by the state or remains uncollected for a long period of time. In short, the State gave away tax money to a homeowner who was a bad credit risk to begin with and the consequences of that bad lending decision come to fruition.

What is completly missing from the "reform" equation is any changes in the housing market itself.

As pointed out here, there is a connection between zoning regulations and housing prices (and thus mortgages). If you reduce the zoning regulation burdens you can reduce the cost of housing and thus avoid the foreclosure crisis.

Of course, that is not going to happen. The zoning regulations keep housing (and thus property) values artificially high. That in turn keeps property tax revenues artificially high and there is nothing like a reduction of tax revenues to make a Maryland politician tremble in fear.

According to the Governor's office, "Prince George’s County continued to have the highest number of foreclosure events, with 2,732. Montgomery County had the second highest number of events, with 1,310, while Baltimore City ranked third with 1,268 events." What do these three jurisdictions have in common, high housing prices and lots and lots of restrictive zoning regulations, oh and a fair number of people who probabaly can't afford the house they live in--obviously. Hmmmm!