Foreclosure-gate, according to T2 Partner’s Whitney Tilson, is not all bad news.
(If you need a little background on foreclosure-gate, click here to see how Tilson explains it in one sentence.)
It won’t affect the economy – just the housing market and the financial sector, and it will only modestly affect those sectors.
Basically all it’s going to do, predicts Tilson, is delay an already clogged pipeline of foreclosures.
“It’s just going to be harder, longer, and more expensive to foreclose,” he told us. And that’s a good thing, he says.
Foreclosure is the worst possible outcome for the economy. If foreclosure becomes the least attractive option for a bank, it’s going to look to other options, of which there are two, he says.
- Restructuring the loan
- A negotiated sale, ie a short sale
One symptom of the foreclosure-gate mess is that foreclosures have become a less attractive option for a bank because now, for example, foreclosures are more subject to homeowners’ hiring a lawyer and fighting it.
So now, a bank will be more likely to choose restructuring the loan, or a sale. Both of those options are much better for the economy.
“If you’re a bank, you don’t want a foreclosure,” explains Tilson. They’re very expensive.
“The home lies empty for months, grass grows up, the value goes down.”
So now, banks’ interests are aligned with what’s best for the economy, which is pretty much anything but foreclosure.
“Foreclosure suppresses the value of surrounding homes and ruins entire neighborhoods, if not cities.”
Millions losing their homes is very disruptive to the economy, says Tilson.
So slowing foreclosures, like what has happened recently, is going to result in millions of homeowners’ staying in their houses rent-free for an extra six months, rather than getting kicked out.
Tilsons says, “Right now, people who aren’t paying their mortgage are staying in homes rent-free for about 2 years. That’ll be extended about six months, so people will get to live in their homes rent-free for two and a half years.”
How will we move forward from there?
“If I were czar,” he says, “I’d set a very high bar for foreclosure.”
Tilson would dangle a carrot out in front of the loan-servicing banks, a reward for not foreclosing in the near future.
“If banks writedown the loans to fair market value, [I’d say,] the government (Fannie and Freddie or Sallie Mae, etc) will step in and guarantee the loan so you can sell it and get cash.”
This is a much better outcome for the bank, says Tilson.
“I would not allow a bank to foreclose unless they’ve found an owner.”
That’s how to make foreclosure-gate work for the economy, and Tilson predicts we will see the government respond with something like this.