As federal regulators clamp down on foreclosure procedures at the big banks, and the government sets new lender requirements for risk retention in residential mortgages, the cry from the industry is that this will only hamper the housing recovery and price more borrowers out of home ownership.
“High down payment and equity requirements will not have a meaningful impact on default rates. But they will require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates," according to a statement from a coalition including the Mortgage Bankers Association and the National Association of Home Builders. "The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. We urge regulators to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.”
On the one flank you have the industry fighting these new regulations and on another they are fighting a potential settlement with the state attorneys general that could involve fines that would go toward lowering mortgage principal for troubled borrowers. They in fact funded a study that found such a settlement would prolong the foreclosure crisis and drive up mortgage interest rates. That enraged consumer advocates. Iowa's attorney general Tom Miller, heading up the 50 state group looking to impose penalties shot back:
"This is a flawed study based on inaccurate assumptions, and it reaches grossly inaccurate conclusions. This study was bought and paid for by the industry, and that fact is reflected throughout."
So the industry fights that regulations and penalties are too harsh and will hurt the consumer, and consumer advocates argue they're not harsh enough and will hurt the consumer.
The fighting goes on in the media and on Capitol Hill, but back in the nation's neighborhoods, the foreclosure problem is only getting worse. As expected, the banks are now getting their paperwork in order and ramping up foreclosures, especially in the non-judicial foreclosure states (where the process does not go before a judge). You can see the huge discrepancy in judicial versus non-judicial states in a report out today from RealtyTrac.
Total foreclosure activity dropped 15 percent in the first quarter of this year from the previous quarter and is down 27 percent from a year ago, but in the last month of the quarter, March, the numbers began climbing, up 7 percent month to month. In Florida, a judicial foreclosure state, activity fell 47 percent from the previous quarter, but is up 5 percent month to month.
"March could be the month where we begin to see the return to the kind of levels of foreclosure activity we would expect given the underlying conditions," says RealtyTrac's Rick Sharga. "We actually did start to see increased levels of foreclosures in the non-judicial states in particular California was up, Nevada was up by about 35%. Even some of the states like Florida that had foreclosure activity pretty much seize up show a little bit of forward movement in foreclosures. So the dam might be starting to burst."
It's a slow burst, which means that instead of a big spike, we are going to see foreclosures plateau at a high level for a prolonged period of time. That will only put more downward pressure on home prices everywhere. About three quarters of the top 200 markets in the nation saw their foreclosure activity rise at the end of 2010, year-over-year, so this is not just relegated to the troubled states we're always talking about, like California, Florida, Arizona and Nevada.
You can argue all you want about new regulations to safeguard the market in the future and pricey penalties to pay for the wrongs of the past, but as foreclosure activity begins to percolate back up again against the backdrop of a still very weak housing market, the industry needs to focus on the present and what exactly they can do to jumpstart home sales and loosen up credit.