Foreclosure freeze gets cold shoulder from experts

A nationwide freeze on home foreclosures.

Outrage over improperly examined, potentially inaccurate foreclosure documents - and the announcement last week that the attorneys general of all 50 states and the District of Columbia would mount investigations into them - seems to make one a real possibility.

Indeed, on Friday, Americans for Financial Reform, a coalition of 250 state and national groups ranging from AARP to the World Privacy Forum, called for a temporary moratorium, saying it would be wrong to "trust those who created them to self-certify correction" of the problems.

A freeze on foreclosures would certainly offer breathing room to individual borrowers battling to hold on to their homes.

But the consensus among economists and industry observers is that a state-by-state moratorium would merely prolong the current housing downturn - if not worsen it.

In September 2008, just days before Lehman Bros. Holdings Inc. filed for bankruptcy, in part because of its subprime-mortgage exposure, Edward V. Murphy, an analyst for the Congressional Research Service, studied the pros and cons of a freeze on foreclosures.

On the plus side, Murphy said, a freeze would give struggling homeowners time to get their financial affairs in order or modify their mortgages. Sellers who were not in financial trouble would not have to compete against lower-price foreclosed properties. Neighborhoods, too, would not have as many vacant homes to deal with.

The minus, in Murphy's view: A freeze would thwart consumers' efforts to buy houses made affordable through foreclosure.

With an eye on 2010's issues, Mark Zandi, chief economist of Moody's Analytics Inc., of West Chester, said a foreclosure moratorium across the United States would be "a serious policy error."

"Policymakers should allow the mortgage servicers and courts to work it out as quickly as possible," he said. "The housing market, and by extension the broad economy, will not completely regain its footing until all the problem mortgage loans are resolved one way or another. A moratorium could significantly delay the day when the economy is off and running again."

Since mid-September, when it was disclosed that documents routinely were not being read before they were signed and submitted for foreclosure action, several banks and loan servicers - Bank of America Corp., Ally Financial Inc.'s GMAC Mortgage division, JPMorgan Chase & Co., and Litton Loan Servicing L.P. - began calling a halt to property seizures and evictions, either in some or all of the states in which they operate.

Wells Fargo & Co. "intensified reviews" of its foreclosures, while not actually halting them. PNC Bank instituted a monthlong hold in 23 states, including New Jersey and Pennsylvania, in which foreclosure actions go before a judge.

Last week, JPMorgan Chase expanded its review of about 115,000 foreclosures to 41 states and said it no longer was using the banking industry's Mortgage Electronic Registration System for foreclosures. Although MERS says it "is a proper party that can lawfully foreclose as the mortgagee and note-holder of a mortgage loan," homeowners' advocates contend that the system does not have the proper paper trail to prove mortgage ownership.

"When banks began slicing and dicing mortgages and repackaging them to sell to other banks, they often failed to transfer the mortgage notes to their new owners," the 2.1-million-member Service Employees International Union said in a statement Wednesday in which it demanded a freeze on foreclosures.

As an aid to those facing foreclosure, SEIU and other groups made available at http://www.wherethenote.com a tool through which homeowners can request copies of their mortgage notes - the documents banks need to prove they own the loans, and thus can collect payments.

Already, spokesman Walt Molony said last week, National Association of Realtors members are reporting concerns that moratoriums now in place will delay closings on bank-repossessed homes.

Unless foreclosed houses are cleared out quickly, economist Patrick Newport of IHS Global Insight Inc., of Lexington, Mass., and others agreed, prospective buyers will continue to wait for lower prices, and sellers will continue to hold firm on prices until they are sure they are not settling for less than they should. The result: further weakening of an anemic housing market.

Among the other drawbacks of a nationwide foreclosure freeze cited in Murphy's 2008 report was that banks needing to recapitalize assets would lose a revenue source.

Most damaging of all, Murphy said, is that "mortgage markets and related financial institutions might remain in turmoil for an extended period, disrupting the financing of student loans, auto leases, municipal funding, and other seemingly unrelated markets."

Should foreclosures grind to a halt now, many observers said, such a stoppage likely would be short-lived - a few weeks or a few months. But the cost to lenders, those interviewed agreed, would be about $2 billion a month - roughly $1,000 for every delayed foreclosure.

As economist Kevin Gillen, vice president of Econsult Corp. in Philadelphia, sees it: "Whether or not [a] moratorium's benefits exceed its costs depends upon which is bigger: the market distortion caused by . . . delaying foreclosures and hence preventing house prices from adjusting to their equilibrium, or the market overcorrection that allows uninhibited foreclosures to drive house prices down below equilibrium."

Policymakers need to make sure a moratorium is not just the mirror image of the home buyers' tax credit, Gillen said: "Both policies move home sales around in time, but with only temporary effect on the housing market, and at a significant cost to the average taxpayer and consumer."

Said Newport: "Foreclosures are being put on hold because lenders cut corners. There is no evidence, however, of widespread fraud by lenders. So at the end of the day, borrowers deep in arrears will still default."

On Tuesday, GMAC Mortgage said that, in the last two months, "no evidence to date of any inappropriate foreclosures" has been found.

It is unlikely that a full-scale moratorium would keep many borrowers now in default in their homes permanently.

"Loan-modification efforts are working increasingly well and provide a number of alternatives for stressed homeowners," Zandi said. "Those homeowners that can viably stay in their homes now have the opportunity to do that."

Although it might not appear so at first glance, the housing market and economy are more stable than they were two or three years ago, and even last year, Zandi said. "And [they are] currently able to digest the foreclosures without undermining the recovery."

Making the financial system more skittish is to be avoided, he suggested.

"The banking system needs to resolve the mortgage problem before it will provide credit more broadly to businesses and households," Zandi said. "Without clarity with respect to the impact on their capital position and profitability, they will remain reluctant to lend more aggressively."