Mortgage foreclosures are back in the news big time, and that news is not good. The gist of the recent reports is that major banks have taken shortcuts with their paperwork—shortcuts that, under current law, stop the foreclosure proceedings dead in their tracks. These flaws in practice are not confined to a few random cases, but permeate entire loan portfolios as harried banks such as JP Morgan Chase and GMAC have seized up, putting their foreclosures on hold for the time being.
The short-term consequence is that defaulting debtors will be able to remain in their homes indefinitely, again without paying down the mortgages. In addition, those purchasers who bought homes out of foreclosure proceedings may well be forced to defend their titles against the original borrowers who went into default. Their bank mortgagees may find themselves in the same boat, having lent money to these individuals who acquired that had been previously foreclosed. The legal costs of these cascading actions could easily lead to more bank failures, requiring yet another ill-conceived round of rescue efforts by the Federal Reserve. Prudent borrowers and lenders would end up footing the bill.
Some economists see a silver lining in this short-term chaos. Their view is that letting debtors remain in their homes will revitalize failing neighborhoods, inducing new buyers to enter that market—assuming, of course, that they can find affordable property with a clean title to purchase. It is wishful thinking to believe that deadbeat borrowers can generate a housing renaissance.
I see no silver lining around the present foreclosure mess. Close to $2 trillion has been lost in the current downturn. Delaying foreclosure won’t recover a nickel of that sum. You can bank on these losses, whether or not the foreclosures are allowed to go forward. Indeed, foreclosure moratoria could well increase the losses, by leading to sharp declines in the maintenance level that short-term owners give to their homes, knowing that the respite is at best temporary.
From a social point of view, the right question to ask is not just how many foreclosures have gone awry, but what changes in business practices or state law have provoked this massive system wide failure. Part of the fault, no doubt, rests with the banks. Securitization of mortgage-backed securities spreads the ownership across many investors. That divided ownership produces handsome gains when the markets are stable because it allows people to diversify their risk positions instead of putting all their eggs in mortgages from a single bank or geographical region.
When securitization was at its height, its practitioners did not create mechanisms sufficient to deal with the systematic risks in their portfolios. Why systematic? Because the lending practices in the private market were heavily driven by the easy money policies of the Federal Reserve and by foolish loan guarantees issued by Fannie Mae and Freddie Mac. The cheap money helped drive the price of real estate upward until the bubble burst. What went up came down—with a vengeance.
The common wisdom is that the crash has wiped out homeowners. But put the losses in context. By far the larger burden has been borne by the banks who made the loans with little money down on properties that are now only worth a modest portion of their original loan value. To see how the numbers work, just assume a mortgage of $200,000 with $10,000 down and say a $100 monthly payment. Once the property tumbles to $100,000, the hapless lender is out $90,000 plus the costs of foreclosure or renegotiation. The borrower, meanwhile, is out only the initial $10,000, and even much of that loss is recouped by staying on the property, without making any further payments on the mortgage, for what is now an average of 478 days or 16 rent-free months, from the date of the first missed payment to the ultimate eviction.
Perhaps no one will shed a tear for the banks, but they should. Bank losses ripple through to employees, pensioners and others with a stake in the bank. At this point, it is wise to rethink the causes of those botched foreclosures. The critical question is how many of those foreclosures result from genuine doubts about whether the debtor is in default or whether the plaintiff in fact holds the mortgage.
Surely some cases will fall into either of these two categories. But it is well worth taking a close look at extensive paperwork needed today to foreclose a mortgage. Some of these defects are technical traps that slow down the process by asking the party who files foreclosure papers to swear that he or she has personal knowledge of the default, which he or she often doesn’t. The real question should be whether the debt has been paid. A rule that let the foreclosure run its course unless the debtor could present a receipt of payment would simplify matters vastly, because most borrowers are in fact in arrears. To protect the debtor against a second suit, the bank would have to agree to indemnify the losses if a second lender came knocking on the door.
Make no mistake about the consequences of prolonging the agony: the people who do not have to leave their homes in default, will not enter the rental market. Those who want to buy the homes at (correct) market prices will stay away for fear that the title is no longer valid. The incipient recovery in the homeowner market will continue to falter.
Foreclosure should be understood as a healthy form of market correction of prior transactions. It should not be regarded as a form of original sin, to be tolerated only under the most extreme circumstances. The older rules were designed to allow strict foreclosures in order to clear title. The new rules will result in short-term victories for some besieged landowners—and fresh losses for everyone else.
URL to original article: http://www.housingwire.com/2010/10/04/the-cleansing-force-of-mortgage-foreclosures
No comments:
Post a Comment