The case for a foreclosure moratorium
John Taylor is president and chief executive of the National Community Reinvestment Coalition, and he's among those calling for a foreclosure moratorium -- and not just because the paperwork was awry. We spoke this afternoon.
Ezra Klein: Why do we need a foreclosure moratorium? What will we gain from it?
John Taylor: Foreclosures are the single biggest contributor to the undermining of the market. What we need to do is put a brake on foreclosures, not accelerate them. They’re the enemy of recovery. We need to manage them so that the mortgages that can be modified are.
EK: But won’t that just freeze the markets and throw everything into more chaos? And as for the homeowners, most of them will end up being foreclosed on anyway. We’ll have delayed the inevitable, adding uncertainty to economic pain.
JT: Those are people who don’t understand what’s happening in the crisis. The point of a moratorium is to give the counselors and the attorneys time to negotiate a fairer, more responsible mortgage product. Mortgages where properties have been abandoned and the banks are repossessing them should go forward. But in other cases, where people have just lost jobs, we can be more patient. Citibank has given those people six months to get back on their feet. That’s what we need, not greasing the skids of this process. People need to understand, every time there’s a foreclosure, if you’re near that house, your property value goes down.
EK: The property-value issue doesn’t get enough attention, I think. But in a new paper, Third Way argues it cuts in the other direction: Removing foreclosures from the equation makes it easier for people to strategically default, as they won’t get kicked out. That will lead to more defaults and thus lower property values.
JT: Bring me a live body. Where are these people waiting to jump into foreclosure? People are in foreclosure because they have no choice. There isn’t a group waiting to pounce on the foreclosure process.
EK: It doesn’t sound to me like you’re looking for a moratorium so much as loan modification. Why not just do that?
JT: They have to be coming hand-in-hand. The point of the moratorium is that it would force the lenders and servicers to the table and it would give those with expertise in working out these problems the time to come up with rational and reasonable solutions, like modifications and refinances.
EK: How long should this moratorium be?
JT: The government has to say, "Okay, there’ll be six to eight months, and after that, we’ll assess whether this is working." And working means that foreclosures where there’s no income or hope of income go into the pipeline and those with income get a responsible loan matching their ability to pay. And the government can say, "Look, lenders, if you want to be able to sell mortgages to the federal housing authority, if you want to use the federal funds window, work with us. We stabilized your industry, after all." And there’s of course more leverage from Fannie and Freddie.
EK: And if we did this, how many of the 11 million or so foreclosures can we expect to modify and prevent?
JT: I would say 50 percent.
EK: Fifty percent?
JT: The reason I say that is that if you listen to what the government and banks say they’ve modified, they’re looking at 3.5 million. If you accept those numbers, that’s about half of the six or seven million foreclosure filings we’ve seen. If we can help half of 11 million people, that’s a huge impact.
EK: And you don’t worry about an intervention like this freezing the market? Insofar as we're inching back to normalcy, that’s at least partly because markets are working normally. If I understand what you’re saying correctly, it’s that a moratorium makes sense not just due to paperwork problems but as a housing policy. But if the government freezes these contracts in order to open them up, that’ll be a whole new ballgame for everyone invested in, or connected with, these industries, both now and in the future.
JT: No, I don’t. We’re not out of the woods with this economy. We’re deep in the jungle. We’re still looking at twice as many foreclosures as we’ve already experienced, and if unemployment gets worse, those numbers will go higher. Unless this situation gets managed, properly, we’re going to continue to have foreclosures dragging down our economy. Things may be going well on Wall Street, but it’s really not going well on Main Street. If people think we’ve gotten through this, they’re really misguided.
This is beyond just the robo-signing and the paperwork. This is a continuing continuum of bad practices and fraudulent lending that got us into this situation. And yes, some of those institutions that did the worst of it are gone, but other institutions have purchased them -- and that means they purchased their responsibilities, too. These homeowners were thinking that the bank wouldn’t be making them a loan if they couldn’t pay it back. They were told interest rates were going down, that they could do this, and they believed it. The responsibility began with the lenders, and it still lies with them. Dodd-Frank actually had to legislate that you can’t make a loan to anyone who doesn’t have the ability to pay. The fact that we had to legislate that tells you how far our financial-services sector fell.
Photo credit: Jim R. Bounds.
| October 20, 2010; 5:22 PM ET
Categories: Housing Crisis, Interviews
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