The case against a foreclosure moratorium
Anne Kim is director of Third Way’s domestic-policy program, and Jason Gold is a senior fellow for housing and finance at the think tank. They’ve co-written a paper on why a foreclosure moratorium would be a bad idea. We spoke this afternoon.
Ezra Klein: The paperwork was bad. Beyond that, we know a lot of people were essentially tricked into these loans. So why not have a moratorium on foreclosures until we can figure out how to deal with this?
Anne Kim: There’s no question that there are a huge number of problems in the housing market, but the moratorium won’t be the answer. All the moratorium will do is delay the inevitable. It won’t solve the underlying problem.
EK: Why not? I spoke to John Taylor earlier, and he argued that giving everyone some breather time in which they can sit down and try and hammer out new terms would keep a lot of people in their homes and ultimately be a better outcome.
AK: He’s making an assumption that there’s a rush to foreclosure going on. But the average time to foreclosure is 470-plus days. This is not about banks jumping into foreclosure. Banks are understaffed on processing foreclosures, and they’re far behind on doing them. He also assumes there’s recalcitrance on the bank’s part to working through these loans. The opposite is the case. They don't want foreclosures. But slowing this down won’t help. This is incredibly painful, but you have to get through this excess inventory before the housing market can really recover.
EK: My understanding of your argument is that you're saying it would be actively harmful to have a foreclosure moratorium. Why?
Jason Gold: There are many, many downstream effects that would come from grinding everything to a halt. It puts pending contracts into limbo. It encourages other people to default. It undermines investor confidence by making all transactions in mortgage-backed securities stop. And 1 out of 4 housing purchases right now is a house in foreclosure, and in Nevada it’s 50 percent. You are talking about literally freezing the markets.
EK: If a foreclosure moratorium isn't the answer, how about something like mortgage modifications? When I speak to moratorium advocates, it seems that it's the modifications more than the moratorium that really interests them.
JG: Let’s take two simple examples. For someone who’s unemployed, what do you modify to? Or for someone who got into a liar loan situation and would never be able to afford the home they’re in and really need to be in a more appropriately priced home?
AK: Modification is not a one-size-fits-all solution. There are cases where you need it. And we're very disappointed by the modification efforts the banks and government have done. They’ve been a disaster from start to finish. But it won't be right for every borrower.
EK: So paint me a picture of a world in which we've gone ahead and frozen foreclosures. What does the economy look like?
AK: Imagine home sales slowing to three-fourths of their current rate -- or worse. There's the fear and the lack of clarity from investors down to homeowners. People stop buying homes and people stop selling homes. They stop buying mortgage-backed securities and stop selling them. Yields go up and interest rates go up. There’s an open invitation to litigation.
JG: And taxpayers would bear the cost of it. Fannie and Freddie will have to keep making payments and now that they're under conservatorship, we’ll be the ones carrying that interest and principal. As long as there isn’t any money coming in on the underlying mortgage, Fannie and Freddie have to cover the payments on that mortgage, which means we have to cover them.
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