Will Allowing Banks to Fail Reduce Foreclosure Homes?

by Peter Vernon on Finance Foreclosures

Allow banks to fail. That is what Republican Senators Richard Shelby of Alabama and John McCain of Arizona suggested even if it means shareholders will also suffer as a consequence.

Allowing some big troubled banks to close and funneling the relief funds to the housing market will come a long way in helping streamline foreclosed homes.

In an interview on ABC’s program “This Week”, Shelby pointed out that financially distressed banks are already hopeless and should be permitted to rest.

Meanwhile, in an interview on the “Fox News Sunday”, McCain said that major banks should be permitted to close even if it means shareholders will suffer as a consequence.

Some industry experts believed that allowing major banks to fail would divert some of the capital infusion to programs that will help abate the flood of foreclosure homes.

A bank rescue program unveiled by Treasury Secretary Timothy Geithner includes a plan to generate about $1 trillion in new consumer lending and to eliminate up to $1 trillion of banks’ bad assets.

The program also includes housing support and prevention of the spread of foreclosure homes. The federal government will expand efforts to lower mortgage rates to reduce foreclosure homes statistics. It will also commit about $50 billion to prevent foreclosures of middle-class houses still occupied by their owners by reducing payments.

Meanwhile, the FDIC issued a directive requiring banks as well as other financial institutions to monitor how the funds from the federal government will help them and distressed homeowners who do not want their properties to be added to the growing list of foreclosure homes.

On the other hand, some industry experts questioned Shelby and McCain’s suggestion to allow banks to live out their existence. They pointed out that the suggestion runs contrary to the goal of the government after it provided almost $90 billion in financial rescue funds and loan guarantees.

Both Shelby and McCain cited as example Bank of America and Citigroup which they claimed have done extensive damage to the country’s economy that they should not be allowed to go on with their current operations.

Shelby explained that closing big banks is one way to send a message to the financial market that it must shape up or ship out. He also hoped that if people will see that aggressive efforts are used to address the financial crisis, it would encourage them to invest in banks again.