Should we root for a foreclosure freeze?
The pressure is on to stop all repossessing of homes until the document mess gets sorted out. But whom will it really hurt?
This post comes from Marilyn Lewis of MSN Money.
You've got to love David-and-Goliath stories. The little guy gets to poke a stick in the eye of the deaf, cold, rapacious bureaucracy and wins the day (if only that one day). Everyone cheers and we all feel better. Frank Capra made his career plucking this note on our heart strings.
But what if, in cheering for the little guy, this time we're shooting ourselves in the foot?
I'm thinking of the slow-motion train wreck of disclosures about problems that lenders and mortgage servicers have created by rubber-stamping legal documents in foreclosure cases. Homeowner advocates, foreclosure-defense lawyers and populist lawmakers are urging a national freeze on foreclosures until the problems can be sorted out.
Depending on whom you talk to, these problems are either:
- A legal and logistical nightmare with the potential to bring down our economy and banking system; or
- A technical issue that will be corrected in time and that, meanwhile, is being exploited by politicians.
Flaming radicals -- and there's a little of this in many of us -- like the idea of throwing a wrench into the grinding cogs of the foreclosure machine by shutting it down, even temporarily. Post continues after video.
Certainly, the lending industry makes a lovely Goliath. How can you not deplore these folks, or at least the system they created to separate defaulting owners from their homes? The New York Times describes it as "a factorylike business that relied on workers with high school educations to process monthly payments:"
The root of today's problems goes back to the boom years, when home prices were soaring and banks pursued profit while paying less attention to the business of mortgage servicing, or collecting and processing monthly payments from homeowners.
Banks spent billions of dollars in the good times to build vast mortgage machines that made new loans, bundled them into securities and sold those investments worldwide. Lowly servicing became an afterthought. Even after the housing bubble began to burst, many of these operations languished with inadequate staffing and outmoded technology, despite warnings from regulators.
To say it's a mess understates the problem. By failing to follow legal procedures, at least some lenders apparently have repossessed homes improperly. These sloppy procedures, along with the packaging and resale of most mortgages as investments, means it's hard to identify exactly who owns many loans. (If you're curious about how mortgage "securitization" works, The Washington Post has this excellent, clear primer.) If homeowners and banks can't prove they own their properties, the big economy-pumping business of real estate can't really function.
Would a freeze help?
The most immediate effect of these legal battles and investigations is to prolong the foreclosure process, which could deepen the housing crisis entering its fourth year. "This growing mess in the foreclosure process just means that the day when the housing market recovers and economy returns to normal is farther away," said Mark Zandi, chief economist at Moody's Analytics, .... "It's not a question of, 'Will this be a weight on the housing market recovery?' It's a question of, 'For how long?'"
A Wall Street Journal online poll (add your voice here) finds that only 17% of readers predict a quick solution; about 46% think the problems will slow down the economic recovery, and nearly 37% predict "devastation" for the real estate market.
Some analysts compare the fragility of this moment with October 2008, when the banking system teetered on the verge of collapse. The Washington Post says:
Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.
Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said.
If judges rule in favor of such lawsuits, "it could be 2008 all over again," said Josh Rosner, managing director at Graham Fisher & Co., referring to the Wall Street meltdown that occurred after Lehman Brothers collapsed.
In our outrage over being put in this position, many of us are demanding something be done, putting pressure on President Obama and Congress to freeze foreclosures.
They're resisting. Obama has pushed back, warning that a freeze could compound the country's economic troubles.
"Top White House officials worry that imposing a national moratorium on foreclosures would backfire by driving down prices even more, delaying the real estate shakeout and potentially creating more foreclosures as additional homeowners find themselves underwater," says the Los Angeles Times.
Rather than calling for a moratorium, a key federal regulatory agency on Wednesday directed lenders to verify their foreclosure processes, quickly fix any problems and refer potential fraud to authorities.
In the absence of problems, the Federal Housing Finance Agency stressed that foreclosures on delinquent homeowners "should proceed without delay."
"Delays in foreclosures add cost and other burdens for communities, investors and taxpayers," said the agency, which regulates seized mortgage financing giants Fannie Mae and Freddie Mac.
And Congress? American Banker Magazine (subscription may be required) finds our elected officials unlikely to act, at least before the November elections.
As questions have mounted about the legality of thousands of foreclosures across the country, lawmakers have ratcheted up the rhetoric in criticizing lenders and urging them to take actions to help homeowners. But a key issue remains: What will Congress do about it?
Distracted by the midterm elections and facing continuing uncertainty about the extent of the foreclosure problems, it appears -- for now at least -- that Congress will weigh in only tentatively.
But it's not timidity and politics alone that keep the feds from jumping into this issue. The clearest authority -- and maybe even the solution -- may lie with the states. It's the states' laws, not federal, that dictate foreclosure procedure. States can "file lawsuits to force businesses to stop actions or to pay damages to wronged consumers," says The Associated Press.
So, while federal authorities are being a) careful and responsible or b) spineless, the states have banded together and seized the initiative, not with a foreclosure freeze but with a joint investigation.
"The states' attorneys general and bank regulators will examine whether mortgage company employees made false statements or prepared documents improperly," says the AP.
That article hints at solutions that might be worked out through the collective pressure from the states:
But legal experts say lenders could be forced to accept an independent monitor to ensure they follow state foreclosure laws. The banks could also be subject to financial penalties and be forced to pay some people whose foreclosures were improperly handled.
For banks, "the most efficient way for them to get out from under this is to settle across the board," said Kathleen Engel, a law professor at Suffolk University in Boston.
The article continues:
At a news conference, (Iowa Attorney General Tom) Miller said the states might be open to alternatives to financial penalties for the banks. They might, for example, agree instead to have lenders step up their efforts to help people reduce their loan payments so they can avoid foreclosure.
It's probably too much to think there'll be one big, negotiated solution that would give everyone in this a little justice. But when you cheer at the delicious thought of throwing a spanner in the foreclosure works, remember that it'll cost you. That's because we're all part of the monster in this story. The government, through Freddie Mac and Fannie Mae, owns a huge share of the mortgages in question. The Journal says:
Banks and other mortgage owners stand to lose $1,000 for each month that a foreclosure is delayed, according to estimates by Paul Miller, an analyst at FBR Capital Markets. If all foreclosures are delayed for three months, that could lead to $6 billion in losses across the industry, with around half of those falling on Fannie, Freddie and government agencies such as the Federal Housing Administration.
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