GOP MOSTLY QUIET ON FORECLOSURES – Morning Money spent some time yesterday looking for other Republicans who might back House Minority Whip Eric Cantor (R-Va.) in his strong opposition to a moratorium on home foreclosures. None immediately turned up. (If you ARE one, drop us a line). Banking executives and their lobbyists said they were not yet aware of any of their usual allies in the GOP willing to take a strong public stand in favor of allowing foreclosures to continue, highlighting the sensitivity of the issue so close to the midterms.
One top lobbyist for a big bank said it would take more high-profile independent analysts coming forward to explain how disastrous a moratorium (or state moratoria) could be in order to get more politicians to step up. “They need some cover,” the lobbyist said. For now, the Obama administration remains the firmest voice opposing any kind of federal moratorium, arguing that many foreclosures are legitimate and that the process, while painful, is necessary to heal the housing market and the broader economy.
Well let’s provide some anti-cover. The massive wave of foreclosures have almost certainly been a major problem that has large spillover effects and has dampened the economy recovery. To the extent that it isn’t, the way we are approaching it is the worst possible.
Separately, is anyone else disturbed by the “Liquidate the Homeowners!” approach that is implied here? That we need to force as many foreclosures as possible in order to heal the housing market? Isn’t that like letting someone who’s arm is cut off bleed out to heal him instead of applying a tourniquet?
Basics here: Foreclosures have large contagion effects. This has been extremely well confirmed by such esteemed financial econometrician as John Campbell, and that is for normal times, not extreme crisis times like we are currently. A foreclosure brings down the price of neighboring properties, making it harder for neighboring homeowners to sell their own. These have cumulative effects.
Foreclosures are usually lose-lose-lose-win. Homeowners lose, as they are kicked out of their homes. Lenders lose, as there is usually a price the homeowner can pay above the recovery value. Communities lose, as there are now abandoned and foreclosed properties laying about. Servicers, middle-men and foreclosure mills win however. So good for them.
The “look the other way” at the foreclosure fraud and the lack of emphasis on modifications and workouts that has been the de facto policy in the country may have transferred huge costs to municipalities that now have to cover taxes and upkeep, an ugly and anti-stimulus form of bank bailout. (See here for more.)
The IMF recently found a strong correlation between foreclosures and unemployment, concluding: ” Measures to raise the number of mortgage modifications, and if needed allowing mortgages to be renegotiated in courts (“cramdowns”), could also be important, as they would help to clear the housing markets more quickly.”
The problem is a debt overhang, not irresponsibility of people who happened to buy at the wrong time. People buy assets at the wrong time all the time; how that loss is shared and worked down in a fast, clean and efficient manner is the most important point. Allowing banks to rework mortgages in bankruptcy is normal in every corporate situation and every other type of situation except home mortgages. We can even create a special type of bankruptcy if we needed in order to protect other consumer debts. We could also emphasize short-sales or, even better, a right to rent approach. A good modification has all the benefits of foreclosure without most of the costs.
We have been on the “Liquidate!” path, though it is not too late to turn back.