Economist floats idea of a credit 'mulligan' for foreclosures

On Monday, I spent time at the Spring REOMAC Conference in Palm Desert, CA. REOMAC is a non-profit trade group for those people involved in bank-owned and other distressed properties. During his time on an afternoon panel, economist Christopher Thornberg, who is also a business partner of mine, brought up the idea of a credit 'mulligan' (which in golf circles allows a player to take another shot after making a mistake) for people facing foreclosure. The idea is that if people don't have to worry about a foreclosure on their record for seven years, they could leave the homes they could no longer afford and then perhaps buy a scaled-down version sooner rather than later.

From a purely macro-economic perspective, credit mulligans could provide greater efficiency in allowing the market to find appropriate prices for distressed properties, force banks to recognize the losses on their books, and help clean up the national balance sheet so we could return to a more normalized housing market. But of course there's the overhang of moral hazard: if people think they're going to get a free pass on bad decisions, won't that prompt them to continue such financial irresponsibility in the future? Although the danger of that could be addressed by instituting specific eligiblity standards based on when a home was bought, it's hard to imagine the average citizen agreeing to such a plan even if it would help solve the issue of rising foreclosures.

It certainly doesn't help that the REOMAC crowd is already viewed as a group of vultures descending on hapless victims of sub-prime and Option ARM loans, as revealed in this article on Monday from the New York Times:

The conference this year is centered on the “R.E.O. tsunami,” referring not to any natural disaster but to the one caused by the flood of as many as 700,000 bank properties now on the market nationwide.

There were just 100,000 in 2006.The tsunami has leveled off a bit in recent months, because of foreclosure moratoriums imposed by major banks and the Obama administration. But the real estate agents here were told not to worry — the flood will continue for several more years, and probably has not peaked yet...

“What we have seen so far is just a hint of what is coming down the pike in the next three years,” Marty Higgins, a San Francisco real estate broker who specializes in apartment buildings, said as he stepped off his golf cart, smoking a cigar...

Educational seminars take place on Monday and Tuesday, where the convention-goers can learn about how a giant wave of foreclosed commercial properties is expected to come in behind the flood of bank-owned homes.

They will also learn how to deal with challenges associated with handling vacant properties, like pools the color of pea soup (the color they turn as algae takes over a pool that has not been maintained), as well as what to do when they find a vacant home with abandoned pets...

Sherry Waite, who serves an affluent community in southern California near San Diego, is eagerly awaiting the foreclosure of some of her neighborhood’s high-priced homes.

“Three dozen R.E.O. listings between $1.8 and $8 million,” she said, a pomegranate martini in her hand, as she cited what she soon hopes to be handling. “Hello! Those are big numbers.”

Sherry was at my table during lunch on Monday when someone else at the table showed her the Times article on his Blackberry. "It's true," she told the table. "I do drink those types of martinis!"