Stop, or avoid evictions?
Never in history was there a real estate bubble without the complicity of a banking system to finance it
There are two ways to end the tragedy of foreclosure evictions. One is to stop them. The other, to avoid them. Perhaps they can be combined. The human tragedy is still raw. Suicides of debtors about to be evicted have ceased for now, thanks to public indignation, protests and the EU Court of Justice ruling that enables judges to stop the process if accusations of abusive contract clauses are involved. But the recent suicides are still there, to our shame.
The figures, though only now receiving publicity, are appalling: 391,032 people ejected from their properties in the period 2008-2012. Of course, these cover all sorts of evictions: houses, flats, offices, garages... However, many concern the family home: some 88 percent of housing loans are for first residences.
The expeditious manner of stopping an eviction is the system of dation in payment - hand over the keys to the bank, and that's that - being proposed by the Mortgage Victims Platform (PAH). It is not proposing this in all cases, as is being said, but only in the case of the first residence. The proposal has advantages: clear, radical, in line with the existing law in many other countries, and giving immediate relief to many citizens. And in a sense it is fair: the excessive indebtedness assumed by the family being only the flip side of the error made by the bank in granting it, often after a hard sell. Never in history was there a real estate bubble without the complicity of a banking system to finance it. No Pilate can wash his hands; all the Pilates must contribute to the solution.
The negative impact of this formula, which the government too brusquely rejected, is threefold. Every retroactive measure produces legal insecurity - though force majeure, and the legislation of neighboring countries, can be adduced.
Besides, it would steeply raise the price of future mortgages. The banks would grant them only in exchange for stiff collateral, and at higher rates, in view of the risk of having an unsellable pile of bricks dumped back in their hands. This would hinder access to owner-housing for people of less reliable income. On the other hand, it might encourage the practice of renting; but in general it looks undesirable. And it would spoil the bank's balance sheet - which matters little to the average citizen, if the alternative is for him to grab the dirty end of the stick.
How badly would it spoil them? So far the banks have estimated the hole at some four billion euros. If that's all, there should be no problem in finding the money; there is even an ample amount left over from the bank bailout fund which, with the EU's input, might be put to this use. Working in favor of limited damage is the tendency of families to sacrifice all else, rather than fail to pay the mortgage; and in consequence, the very modest default rate in housing: some 3.49 percent of total loans. Yet the loss figure might increase: unemployment causes default to soar.
For this reason a dation in payment system broad enough to cover all the cases of vulnerability and hardship, which would impede most of the evictions, could be complemented with another formula that would avoid them entirely - enabling families to go on living in their houses, while enabling banks to stay afloat.
Such a plan was implemented by Franklin D. Roosevelt in 1933, soon after he took office and four years into the Great Depression. He set up a public agency that purchased mortgage positions from the banks in exchange for bonds. And from these positions, he restructured the debt of families fallen into unemployment and unable to pay. He gave write-offs, extended terms of repayment and lowered interest rates, thus saving some 25 million families. This plan "substantially" reduced the number of foreclosure evictions. You will find its history in Dealing with Household Debt, chapter three of the World Economic Outlook released by the IMF last April. Can we take a leaf out of their book?