Homeowner-rights laws bad for housing?
State laws that ensure borrowers' rights slow foreclosures and don't help in the long run, researchers say.
This post comes from Marilyn Lewis of MSN Money.
State and federal laws meant to protect homeowners from losing their homes to bank misbehavior fail to help in the long run and may even be prolonging the housing crash, new information suggests.
Reuters recently described research by three Federal Reserve economists who analyzed a large number of foreclosures done between 2004 and 2011. (Their report, at the Federal Reserve Bank of Boston's site, is "Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process.")
The Fed paper compares outcomes in states that require lenders to foreclose through the courts ("judicial" states) and states that do not. "In states requiring a judicial review for foreclosure, delays associated with the process had no measurable long-term benefits and often prolonged the problems with the housing market," Reuters says.
Homeowner protections are effective in slowing down foreclosures. In Nevada, which has the "stiffest borrower-protection laws," foreclosures have "all but ground to a halt," Reuters says.
But the researchers found that court protections make it no more likely that homeowners will bring their mortgage payments current or renegotiate their loans. (Post continues below.)
They did not study the effectiveness of government programs encouraging mortgage modifications and refinancing. However, they cite a study by different authors that came to a different conclusion: that "modiﬁcations may be more common in judicial states, perhaps because the longer timeline allows borrowers greater opportunities to work with lenders or perhaps because it provides lenders with more incentive to modify loans, since the longer foreclosure process is more costly."
The researchers say other problems may result from slower foreclosures, however. "Policies designed to protect borrowers from foreclosure may have the unintended consequence of aggravating the externalities -- crime, vandalism, and inhuman living conditions for tenants among them -- associated with failed homeownerships."
Real-estate agent Ricky Beach blames Nevada's homeowner protection law, adopted in October, for reducing the number of homes for sale in Reno, Nev., from about 1,700 in September to 778 now. Reuters writes:
This has triggered a "mini-bubble" in housing prices because the few properties available are receiving multiple bids. The only problem: No one thinks the gains are sustainable.
"The bill did nothing to solve the crisis -- it's just prolonged it," Beach said. "Sooner or later the banks will work out how to deal with the law. And then foreclosures will hit the market, and prices will crash back down."
Explosion of state laws
"More than 400 foreclosure laws were enacted across the United States in 2011 alone, and most slowed down the process," Reuters writes, citing as its source the National Conference of State Legislatures, a bipartisan organization.
Currently, the California Homeowner Bill of Rights is making headlines. Gov. Jerry Brown signed it into law this month. It becomes effective Jan. 1.
It will, according to Fresno's KFSN-TV:
Ban "dual-tracking" (which is when banks pursue foreclosure even though the homeowner is seeking a loan modification).
Require one contact person per customer.
Increase penalties for robo-signing (which automatically approves foreclosure without anyone reading documents).
Let homeowners sue for violations.
Similar bills are being considered in 25 states, The Wall Street Journal says. "The moves have been prompted by concerns that lenders have been inefficient in restructuring mortgages, which results in unnecessary foreclosures, while using shoddy paperwork to repossess homes."
Lenders deplore the trend toward state laws. Writes the Journal:
"Should all 50 states decide to go down their own path, lenders are going to have multiple processes, each with their own little nuances, and every single penny of that cost will be borne by tomorrow's borrowers," said David Stevens, chief executive of the Mortgage Bankers Association.
American Banker, an industry publication, predicts that California's law will "slow foreclosures, impose stricter rules on mortgage servicers and potentially raise the cost of getting a home loan."
The critique of state homeowner protection laws comes after years of efforts by consumer advocates, including most state attorneys general, to compel banks to foreclose more carefully.
The Reuters article allows that "many consumer advocates say that forcing banks to mediate with those behind on their mortgages rather than foreclosing on them has reduced the pain and sense of dereliction in many communities."
Naked Capitalism blog's Yves Smith goes further, heaping scorn on the Reuters article and calling it "a remarkable piece of bank PR masquerading as 'insight.'" The blog post headline: "Quelle surprise! Fed economists side firmly with bank criminality over the rule of law."
Homeowner protection laws aren't "anti-foreclosure laws," Smith points out; they are laws that ensure foreclosures are carried out legally.
"Foreclosure fatigue" is setting in, Smith says. "A lot of policy people want to move on because the topic has no upside for them."
Smith criticizes the Fed study for considering the problem too narrowly. The slow pace of foreclosures actually helps banks, Smith says. "Placing massive numbers of properties on the market at once would crash the market and destroy the value of their portfolios."
Funny how there is nary a mention of the reasons banks have for wanting to draw out foreclosures: more servicing and late fees, deferral of recognition of losses on second liens. Nor is there any mention of how, in Las Vegas, I have been told by informed insiders that there are entire blocks in affluent areas where pretty much no one has paid their mortgage in over two years as of late 2010 with nary a foreclosure notice sent.
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