The Politics of Foreclosure

I'm not going to tally the number of Attorneys General filing lender lawsuits or lawmakers demanding foreclosure moratoria, because the minute I do the number will change.

Suffice it to say that you're not in political fashion these days if you're not "demanding" a federal investigation into shoddy foreclosure procedures or "ordering" a freeze on foreclosures for the foreseeable future, even though you might not exactly have the jurisdiction to do so.

Foreclosure Sign
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Foreclosure Sign

“Our families deserve to know that an action with such a huge and lasting impact is the absolute last resort, and that every effort has been made to keep them in their homes prior to foreclosure,” wrote Oregon Senator Jeff Merkley. He's a Democrat, by the way, and they appear to be in the majority of those screaming at the wind; gee I wonder why.

No less than the Speaker of the House, Nancy Pelosi, and her cadre of California lawmakers noted that, "Avoidable foreclosures end up being unnecessarily costly for homeowners, lenders and servicers, and our housing market, whose health is essential to our economic recovery," in a letter addressed to the U.S. Attorney General, Fed Chairman and the acting Comptroller of the Currency. "Recent reports that Ally Financial (formerly GMAC), JP Morgan , and Bank of America may have approved thousands of unwarranted foreclosures only amplify our concerns that systemic problems exist," she adds.

And it's not just the Dems posturing on this one. Far be it for Republicans to pass up a chance to use the scandal as a weapon. Alabama Senator Richard Shelby, ranking Republican on the Banking Committee is calling for a hearing: "I am highly troubled that once again our federal regulators appear to be asleep at the switch.”

I'm not going to feign surprise at any of this. It's to be expected, especially given this particular upcoming election. I just wish these folks would stick to the facts. This scandal is largely about bad paperwork, not "unwarranted foreclosures." Right now close to 10 percent of borrowers in this country are delinquent on their loans.

Translation: They're not paying their mortgages.

Another 4 percent have been delinquent for so long that they're now in the foreclosure process.

Yes, the process is flawed because the banks clearly aren't equipped to handle the numbers.

Yes, there may be some loans that could have been saved, but the vast majority can't.

Still lawmakers want to freeze all foreclosures to make sure all of them are fair because, as Speaker Pelosi writes, "People in our districts are hurting."

The question is, how much would a foreclosure freeze hurt the greater housing market?

I asked some mortgage mavens and got the following responses:

Josh Rosner, Graham-Fisher: With REO sales being a large part of supply we would see home prices artificially and unsustainably rise, foreclosure volumes paint a false picture of stability and investors in MBS would be further harmed as their losses grow. Once the moratorium ended prices would fall and foreclosures would skyrocket. But, it would paint a prettier picture than reality heading into mid-term elections.

Guy Cecala, Inside Mortgage Finance: Instead of having a ton of mortgage borrowers who haven’t made any payments in at least a year, we would have a ton who haven’t made a payment in a year-and-half. Keep in mind we will have new problem loans entering the system throughout any moratorium whether we acknowledge them or not. Do we seriously believe that a foreclosure moratorium can change the outcome of potentially 5 million or more homeowners losing their homes over the next two years? Ultimately, if we don’t do something to handle distressed properties more efficiently (and faster), the housing market is going to remain stuck in limbo with no recovery in sight.

Janet Tavakoli, Tavakoli Structured Finance: Banks are vulnerable to lawsuits from investors in the [securitization] trusts. This problem could cost the banks significantly more money, which could mean TARP II (Washington Post)

Rick Sharga, RealtyTrac: If foreclosure sales are prohibited, home sales would tail off dramatically...foreclosures and REOs accounted for over 30% of all sales during the quarter [Q3] Fewer home sales will put more pressure on home prices, reduce tax receipts for already-strapped municipal and state governments, and put even more pressure on an already-moribund economy. This could cause at least a temporary loss of jobs in a number of sectors. A 90-day moratorium would also extend the housing market downturn, pushing the anticipated recovery from early 2014 into late 2014 - and possibly even longer.

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