What's so bad about foreclosures?

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While politicians and community groups work overtime to try to find solutions to the wave of foreclosures, there's a chance that they'll actually be making families worse off by letting them keep their homes. Here's why: If a family owes $400,000 on a house that is now worth $300,000, letting them keep the home with a lower interest rate still leaves them with a negative worth of $100,000. Mightn't it be better to let them walk away and start off with a net worth of $0, and build back their savings and credit?

Real estate consultant Ramsey Su thinks so. In an op-ed piece in The Wall Street Journal, he writes that "The intent of modification programs to date is to create a generation of mortgage slaves. Fortunately, mortgage slaves can free themselves via foreclosure, and the masses are choosing to do so."

He lays out the case in some detail in the piece but his argument seems likely to be ignored. Talking about "saving people's homes" is politically expedient and it's a position that's much easier to articulate than the more nuanced "Foreclosures are actually good" one.

Loan modifications that reduce mortgage balances to the point where borrowers have some equity are preferable to outright foreclosures, but most lenders are understandably reluctant to do that. This compromise of extended loan terms and lower interest rates on inflated balances may not be in anyone's best interests.
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