Issac Bailey | Turnabout fair play for banks

Seems everyone is trying to come up with sensible ways to deal with the economic albatross that the depressed real estate market has become, except for the one group with the most power to quickly usher in a turnaround, the nation's five largest banks.

Others are using their power to grapple with this complex problem. A reform of the so-called point-of-sale law, which assesses the value of a property of a home when it is sold, is being considered. It passed the S.C. House of Representatives on Thursday. And Jean Toal, S.C. Supreme Court Chief Justice, issued an order requiring lenders to give most homeowners a more realistic chance at a loan modification before foreclosure proceedings can go forward.

Changing the point-of-sale provision might hurt the revenues of cities and counties, which are already strapped for money in a tight economy, while Realtors say the law is hurting investment sales and is unfair because neighbors can end up with vastly different tax rates.

The law has made for mismatched tax bills in the same neighborhood, but there's nothing untoward about that. A person buying into a neighborhood this year that was originally developed at the height of the once-hot market likely will pay tens of thousands of dollars less than their neighbor who bought three or five years ago. That's not unfair. That's simply the reality of market forces. Rarely is there a period when everyone can or should expect to have the same return, be that on taxes or overall price.

The point-of-sale law should be changed, but only in the context of an overhaul of South Carolina's mind-bogglingly complex tax code, which includes $2.5 billion dollars of exemptions the General Assembly should get rid of, but isn't. If that law causes some investors to reconsider their plans for our market, that isn't necessarily a bad thing. The market is hurting so much today in large part because investors helped turn it into a veritable casino that left us high and dry when real estate values plunged.

Toal's order may slow the pace of foreclosure sales, which is a fair concern, given that distressed properties must be cleared out before the market can be stabilized. But the order is necessary because of well-documented foreclosure abuses by some banks. Investigations by the Wall Street Journal, "60 Minutes" and others uncovered such practices as forged foreclosure documents. Those abuses, not Toal's order, should be blamed if the sale of foreclosures slows.

But there's a quicker, fairer way to heal the market, though it would require the type of shared sacrifice the largest banks seem unwilling to engage in, which was perfectly illustrated a few weeks ago by Brian T. Moynihan, the chief executive of Bank of America, when he was asked about a potential deal between the federal government, states attorney generals and the five largest banks to settle claims of faulty mortgage practices.

The potentially $30 billion deal could mean reduced mortgage balances and/or lowered interest rates for qualified homeowners, mainly those in danger of losing their homes.

Moynihan balked at that possibility.

"There's a core problem that if you start to help certain people and don't help other people, it's going to be very hard to explain the difference," he said. "Our duty is to have a fair modification process."

It wasn't fair to taxpayers when the government bailed out Bank of America with $45 billion in loans. But taxpayers, through their representatives, did it any way because it was necessary to prevent another great depression, even though many of the economic problems stemmed from suspicious practices by Wall Street banking executives.

It makes sense to cautiously craft a mortgage modification program because it's important that those who receive the help can maintain the lowered payments. But here is where I believe Bank of America and other large banks can help themselves in the long-term and the real estate market now: They can either reduce the principal or interest rates on the loans of homeowners who have kept up with their payments but whose mortgages are more than their homes are currently worth.

Those homeowners have proven that they can make payments, and they represent the best chance for the type of near-term churn the market desperately needs. Currently, those homeowners have trouble selling because of depressed values, and they can't refinance.

If that changes, those homeowners would be freed up to buy or sell, which would create much-needed activity in the market, and that activity would be built upon people invested in local markets for the long-term - unlike fickle investors.

The real estate market would stabilize more quickly, and that could light a fire under the recovering job market because when real estate is strong, jobs quickly follow. And a stronger economy would be good for homeowners and large corporations a like.

That can happen only if the largest banks do for underwater homeowners what taxpayers did for once-underwater banks.