09.30.2010 0

How About a Government Moratorium?

  • On: 10/19/2010 08:45:07
  • In: Economy
  • By Robert Romano

    Another week, another government bailout.

    In light of a 50 state joint investigation into the alleged improper filing of foreclosure claims by financial institutions, several Capitol Hill lawmakers are now calling for a national moratorium on the entire foreclosure process. Those include embattled Representatives Alan Grayson and Gabrielle Giffords, among others, who literally want to shut down all foreclosures for an indefinite period of time.

    There would be several consequences to this. If Congress shuts down the foreclosure process, it also would have to shut down the foreclosure sale process, which in the second quarter accounted for over $43 billion of home sales, according to RealtyTrac. Distressed institutions attempting to dig their way out of the financial crisis would be forced to keep that much of these non-performing assets on the books every quarter while a moratorium was in place. That could total more than $150 billion annually for every year a moratorium is in place — all to allow delinquent borrowers to stay in homes they cannot afford.

    While a moratorium was in effect, prospective homebuyers would also have to put their plans on hold. In short, the housing market would seize up.

    Moreover, a foreclosure moratorium would create an incentive not to pay one’s mortgage, plain and simple. There would be disincentives against delinquent borrowers from even doing basic home upkeep. This would further depress the quality of neighborhoods, causing prices to depreciate even more than they already have. This in turn would place more pressure on underwater borrowers, causing more strategic defaults.

    Therefore, an indefinite foreclosure moratorium would actually increase the number of overall foreclosures that ultimately occur. That’s very bad policy.

    While everyone would rightly be sympathetic if foreclosures were filed in error, resulting in families being thrown out of homes they were current in the payments on, that’s not what appears to have happened here. “As was the case for our judicial state review, our initial assessment findings show the basis for our foreclosure decisions is accurate,” Bank of America spokesman Dan Frahm said on October 17th. The bank is once again resubmitting foreclosure affidavits after it had temporarily suspended foreclosure operations across the country.

    So, it appears properties have been legitimately foreclosed upon, but in some cases the paperwork may not have been properly processed. That must not now become a “Get Out of Jail Free” card for delinquent borrowers to stay any longer in homes they simply are not making payments on. But that appears to be exactly what Grayson, Giffords, and Co. want — all in a continued, coordinated attempt to create a political constituency out of borrowers behind on their payments.

    Even achieving a temporary moratorium for 60 to 90 days is something lawmakers want credit for “helping” Americans to keep homes they will ultimately be thrown out of anyway. In 2009, California imposed a 90 day moratorium on foreclosures, requiring banks to modify mortgages for distressed borrowers. Unfortunately, the modifications failed, and after the moratorium expired, the march of foreclosures continued, with over 65,000 in California during the second quarter alone.

    California was not alone. Several states, counties, and institutions have repeatedly set up moratoria on foreclosures throughout the financial crisis.

    In November 2008, Fannie Mae and Freddie Mac engaged in a moratorium because throwing homeowners out of their homes over the holidays was considered cruel. In 2009, Representative Barney Frank called for another moratorium. Then the excuse was to allow the Obama Administration time to present its plans to reduce foreclosures. He got what he wanted, and several banks held off on foreclosures while the White House prepared its policy.

    Then, the Obama Administration implemented its $75 billion mortgage modification program. But, former chief credit officer of Fannie Mae Edward Pinto in testimony before a House oversight committee estimated a likely 40 percent re-default rate for the attempted 340 thousand active permanent modifications. Even then, the Treasury fell way short of its stated goal to “help as many as 3 to 4 million struggling homeowners avoid foreclosure.”

    Taken together, government and other institutional efforts at forestalling foreclosures have slowed up the overall process of the housing market correcting by almost a year. Bear in mind that depending on the locality, a foreclosure can take months or more than a year to initiate. This has already had the effect of artificially increasing the supply of foreclosed properties, further depreciating prices — all contrary to the stated goals of elected officials.

    In fact, the current spate of foreclosures, with over 347,000 in September according to RealtyTrac, can in large part be owed to government continuing to stand in the way of the process moving forward. And all government wants to do is slow it down even more. “Robo signers” is just the latest excuse to do so.

    Perhaps what is really needed is an indefinite moratorium on all government intervention into the housing market.

    Government did everything it could to blow up the housing bubble with easy money and loose lending standards, and after it popped, it has done everything to prevent the market from correcting itself. It’s time for government to finally get out of the way.

    Robert Romano is the Senior Editor of Americans for Limited Government (ALG) News Bureau.

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