Krugman: Shadows And Fog (foreclosures) [View All]

[ProSense]

Shadows And Fog

I’m finding the foreclosure issue difficult to write about; it’s clear that there has been massive malfeasance on the part of the banks (again), but it’s less easy to say what should be done. One thing is clear, however: the main argument being made for turning a blind eye to the situation, and avoiding anything like a temporary freeze on foreclosures, is wrong.

I’m referring to the argument that we need to let foreclosures proceed, never mind the doubts, because it’s important to get those properties seized and sold, so that we clean up the mess. That’s the argument you’ve been hearing from administration officials — and it sounds reasonable if you don’t look at what actually happens to foreclosed homes.

For the fact is that a startling number of those homes aren’t being sold: there’s a huge “shadow inventory” of homes that have been seized, but not yet put on the market.

If servicers really wanted to get homes sold and the issue resolved, they’d be doing short sales: letting the current owners sell the homes for whatever they can get, hand the proceeds over, and call it quits. And there are a lot of short sales out there — but there are also many cases in which short sales are being refused, and foreclosures take place instead.

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