Bank of America halts all foreclosures, Reid demands halt to all foreclosures in Nevada, Obama pocket-vetoes noncontroversial notary recognition measure to speed up foreclosures, and the Maryland congressional delegation calls the “fundamental fairness of the entire foreclosure process in serious doubt.” These are just a few of the recent headlines tracking the “financial scandal” de jour.
Why? In one of the 23 states requiring judicial foreclosure, a state court lower-level judge thew out a foreclosure action because a clerk failed to read all the foreclosure documents before signing them. In that case there was no question that the borrower had defaulted on the mortgage nor was there any question that the lender was entitled to foreclosure. The lender was being efficient by using a so called “robo-signer” to execute the documents.
The mortgage market works like this: you borrow using your house as security, you sign a promissory note (“I promise to pay”), you pay the monthly loan installments and get to live in your house. If you default and don’t pay, after notice and a grace period, your lender forecloses and tries to sell the house to get back the money you promised to pay but didn’t. What could be simpler? The clerical judge seeking headlines threw out the foreclosure action which has the effect of letting the defaulting borrower live in the house without paying the mortgage, rent, or anything else for that matter! Is this fair?
Let’s look at the consequences of this silliness, immediate and long range:
- Existing home values are in doubt and sales decline. This because of the inventory build up of defaulted mortgages.
- Pricing of comparable houses is in doubt because market clearing prices can’t ber reached absent a public foreclosure sale, an auction on the court house steps.
- The mortgage market will decline because lenders and investors will not feel secure in their loan security.
- Mortgage rates will go up because of the added costs of foreclosure.
- Loan to value ratios will go down and credit standards up because of the weakened security.
- New housing construction will decline because of the existing inventory build up and tougher mortgage requirements.
- Housing occupied by the borrower-turned-squatter will deteriorate causing the ultimate foreclosure value realized to decline and the lender losses to increase.
- Fannie and Freddie will be required to pay more on their guarantees to the market and their losses will increase.
- Taxpayers will be required to fund increased losses of Fannie and Freddie which deal in 90% of the mortgage market.
- Finally, the economy will face slower growth or additional decline since housing as a principal driver will be weakened.
So, the banks may roll over for fear of Obama and the politicians may have an “us and them” field day calling for halts to foreclosures, but in the end this will hurt the middle class that pays its mortgages and funds the government with its taxes. It is much ado about nothing, pure silliness that creates another economic drag to a fragile economy.