10.25.2010 0

Economic Consequences of Foreclosure Moratorium Should Take Precedence over Emotional Appeals

By Kevin Mooney –

On the surface, it is very easy for readers to sympathize with financially stressed families that may be evicted from their homes. But emotional appeals should not serve as a substitute for reporting on the economic consequences of government intervention that will cost prospective homeowners over the long-term.

News reports that personalize the misfortunes of individuals who have been identified as potential new constituents for the political class make for highly effective yarns. Here the New York Times takes up the case of Nicholle Bradbury, a resident of Denmark, Maine, who cannot keep up her mortgage payments and faces a potential eviction. On the surface, there is good cause for sympathy.

Questions have been raised about the paperwork and methodology associated with Bradbury’s case. She has also lost her job and her husband can no longer work for health reasons. The family, which includes two teenagers, lives on welfare and foodstamps according to the report.

The villain here is identified as GMAC, which was previously the financing arm of General Motors. It received $17 billion from taxpayers in an effort to keep it from failing and is now majority-owned by the federal government. The NYT quite correctly offered the lender the opportunity to comment, which GMAC understandably declined to do as the case remains in litigation.

Unfortunately, the story line here omits economic realities that intersect with the interests and concerns of Americans who eager to become homeowners. If the federal government intervenes to prevent market forces from working to alleviate the housing crisis, sales could be halted even as foreclosures accelerate.

To be sure, GMAC should be called out and challenged for using “robo-signers” who are not in command of key facts, but there is also a price to be paid for interrupting the foreclosure process that goes uncovered in the report.

Robert Romano, a senior editor with Americans for Limited Government’s (ALG) news bureau, has filed a very detailed report that explores the potential fallout associated a nationwide moratorium on foreclosures that some lawmakers have proposed.

“There would be several consequences to this,” Romano observes. “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.”

There’s more.

A foreclosure moratorium would also create perverse incentives, Romano explains, that reward the irresponsible at the expense of citizens who are financially positioned to pursue real estate. Under this scenario, delinquent borrowers would have no cause to maintain their homes. Consequently, the quality of neighborhoods would deteriorate, which in turn would undermine housing prices.

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

Going forward, the NYT would better serve its readership with informed analysis from economists who have understanding of long-term consequences that flow out from federal intervention into the private sector. That’s the real story.

When already beleaguered institutions are forced to keep non-performing assets on the books to placate economically illiterate policy makers, average Americans lose out. They should at least have a voice in the NYT. Instead, the Gray Lady appears to be fixated on paperwork issues that are peripheral to the major issues at work here.

If families are evicted from the homes in error, that would be just cause for outrage. But there is some debate about this. “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 in reality, it would seem that the properties in question have been legitimately foreclosed even if the paperwork had some flaws. Allowing delinquent borrows to sidestep their responsibilities should not be the answer as the NYT seems to imply.

Kevin Mooney is a contributing editor to Americans for Limited Government (ALG) News Bureau, and the Executive Editor of TimesCheck.com.

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