“Banks are sending these loans into foreclosure for good reason, and taxpayers would have to pony up some serious cash to prevent banks from doing so.

via Why so few mortgage mods? | Free exchange | Economist.com.”

This is a very interesting article that includes a link to a very interesting study from the Federal Reserve.

There really is no good solution to the foreclosure problem other than to get a move on with it.

Rather than focusing on bailing people out, or forcing banks into making bad deals it might simply be better to focus on cushioning the blow. How can that be done?

One way might be to recognize that the housing bubble and subsequent pop has captured a lot of people that an ordinary correction would not have touched. That being the case FHA in particular should relax the requirements on purchase after foreclosure or short sale.

Restrictions would need to apply, but they need not be insurmountable. For instance a person who otherwise has good credit, a job, but had a foreclosure would qualify if: it can be shown that the foreclosed property was underwater (sold for less than the liens against it), the borrower can demonstrate otherwise clean credit, down-payment can be made, and the debt-to-income ratio be restricted to a hard 32%. Otherwise clean credit would have to be established by analysis of the credit report beyond what the credit scores show since the scores would obviously take a hit from the foreclosure.

I am sure there are all sorts of problems with such an alternative plan, but is there really a good solution here?