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The case for a foreclosure moratorium

foreclosemess.JPG

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.

By Ezra Klein  | October 20, 2010; 5:22 PM ET
Categories:  Housing Crisis, Interviews  
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Next: The administration's foreclosure policy -- for now

Comments

My first thought when the documentation problem came to light was that home owners might finally have some leverage to negotiate new terms. I think he's right that some houses have been abandoned and those foreclosures should proceed. But if it's a case of being underwater, or being temporarily unemployed, then maybe we need to force banks to the table.

One strain of thought that has been of interest to me is the comparison to the farm crisis of the 80's. There's a professor at Iowa State who helped push a new chapter in the bankruptcy code for farmers, which allowed them to cram down debt. (A reference to this is here: http://www.truth-out.org/foreclosure-crisis-phase-2-the-negative-equity-dilemma61272). So far, the bank lobbyists have refused to consider this at all, saying the fault is entirely with the homeowner. Depending on how much this crisis blows up, there may be another opportunity to pursue this kind of relief.

Posted by: reach4astar2 | October 20, 2010 5:57 PM | Report abuse

Klein and Taylor play the Appeal-to-Short-Term-Selfishness card:

--*People need to understand, every time there’s a foreclosure, if you’re near that house, your property value goes down.*--

More broadly, people need to understand, every time a bank is prohibited from managing its assets according to the terms of contracts mutually signed, there is that much less capital available to invest or loan to people who won't be delinquent in their repayments.

Home prices are not going to rise, economic activity is not going to pick up, until a very large chunk of the money tied up in bad investments begins moving again, and that isn't going to happen with busybodies like Klein and Taylor running around agitating to run other people's businesses for them.

Posted by: msoja | October 20, 2010 7:56 PM | Report abuse

"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."

About 1/5 delinquent mortgages were estimated to be "strategic defaults" back at the end of 2008 - nearly 600,000 for the whole year.

http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story

Wonder what happens if you put in a six month or eight month foreclosure moratorium in place - not only does the backlog grow, but you give anyone on the fence a six to eight month head start before the foreclosure process can even begin. That's a lot of rent-free time in a home.

If your house is worth $200,000 and you have $245,000 left on your mortgage, and you can live in the place 12-15 months rent free, why not? Even the MBA walked away on their underwater mortgage!

Start banking your next down payment now, and in a few years you can get back in the home ownership game.

"People need to understand, every time there’s a foreclosure, if you’re near that house, your property value goes down."

Yup, but kicking the foreclosure can down the road (and potentially getting more strategic defaults going) doesn't fix the problem.

"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."

Though of course, a large number of these modifications fail. More than 50% of HAMP loan modifications failed, with many being less than a year old.

http://www.istockanalyst.com/article/viewarticle/articleid/4527540

Why?

http://www.ritholtz.com/blog/2009/12/why-loan-mods-fail/

Ultimately, prices need to be allowed to go down so that the market finally - FINALLY - clears.

If you look at Prof Shiller's house price data, real home prices remain about 17% above the 1946-1997 pre-bubble average (which was very steady).

http://www.econ.yale.edu/~shiller/data.htm

Given high inventory/vacancy rates and low sales, prices will need to resume falling.

Posted by: justin84 | October 20, 2010 10:29 PM | Report abuse

Mortgage refinancing is an outstanding plan particularly as the home mortgage rates are imminent downward. Under such state of affairs it will be beneficial for you to refinance your home as you’ll be able to obtain a lower interest rate thereby reducing the amount of your monthly payment. Search online for "123 Mortgage Refinance".

Posted by: harryblack21 | October 21, 2010 6:39 AM | Report abuse

We need to replace bad mortgages that were made because perverse incentives allowed large up front profits for mortgage originators and securitizers without accountability. We need to replace the bad mortgages with good mortgages that are affordable, reflect the real value of the property, and do not have predatory features. Then borrowers will pay their payments. That is how we will recover. The Administration's HAMP program has failed to do this, mostly because the industry has resisted. Few modifications are made and many that are made are worse for the borrowers, with higher payments or balances or both, and unlikely to succeed long term. It appears that the industry is trying to game the system, and delay recognizing the inevitable losses when bad mortgages are foreclosed on. There is also a cottage industry that profits from foreclosures, often at the expense of the investors in securitized trusts that own the loans. Their cutting corners has gotten attention but it is just part of an overall abusive pattern of doing business. HAMP needs to be scrapped and replaced with a simpler program suitable to the large volume of modifications that are needed. Foreclosures are a major problem for economic recovery, not a solution. Foreclosures destroy individual families and communities as vacant homes drag down everyone's home values and create all sorts of problems. Schools that depend on property taxes can't pay their teachers. The loanholders take huge losses in a flooded market, and this holds down the economy. Ultimately we could not finance a consumer economy with debt propped up by illusory increases in home values.

Posted by: shirtle | October 21, 2010 11:01 AM | Report abuse

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