Preventing unnecessary foreclosures is key to improving economic growth. That’s a major point in a recently released white paper from The Federal Reserve Board of Governors. Below I’m highlighting analysis and policy suggestions from the white paper released on January 6th, 2012.
Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery.
Among the policy priorities the Fed promoted were:
- moderate the inflow of properties into the large inventory of unsold homes
- limit the number of homeowners who find themselves pushed into an inefficient and overburdened foreclosure pipeline.
Foreclosures are the market’s way of repossessing assets from non-paying borrowers. The key word here is non-paying. If the market is not distinguishing between paying and non-paying borrowers, we have a problem. Dual-tracking is a big part of this problem. Homeowners who can afford to stay in their homes are still losing them to foreclosure. We have a similar problem with short-sales. Many real estate agents in Virginia have had short-sale deals fall through because Virginia’s foreclosure process beat them to the punch. Both loan modifications and short sales are far better for the economy than another foreclosure on the market.
The Fed highlighted these problems in the mortgage servicing industry in their analysis:
A 2010 interagency investigation of the foreclosure processes at servicers, collectively accounting for more than two-thirds of the nation’s servicing activity, uncovered critical weaknesses at all institutions examined, resulting in unsafe and unsound practices and violations of federal and state laws. Treasury has conducted compliance reviews since the inception of HAMP, and, beginning in June 2011, it released servicer compliance reports on major HAMP servicers. These reports have shown significant failures to comply with the requirements of the MHA program.
The market is not being served well by these mortgage servicers. Their unsafe and unsound practices have hampered the housing market from recovering. The Fed goes on to explain in detail, the effect of unnecessary foreclosures:
the large inventory of foreclosed or surrendered properties is contributing to excess supply in the for-sale market, placing downward pressure on house prices and exacerbating the loss in aggregate housing wealth.
On how foreclosures mitigation must be a priority, the Fed describes how foreclosures are bad for everyone involved (I’ve bolded phrases for emphasis):
foreclosures inflict economic damage beyond the personal suffering and dislocation that accompany them. In particular, foreclosures can be a costly and inefficient way to resolve the inability of households to meet their mortgage payment obligations because they can result in “deadweight losses,” or costs that do not benefit anyone, including the neglect and deterioration of properties that often sit vacant for months (or even years) and the associated negative effects on neighborhoods. These deadweight losses compound the losses that households and creditors already bear and can result in further downward pressure on house prices. Some of these foreclosures can be avoided if lenders pursue appropriate loan modifications aggressively and if servicers are provided greater incentives to pursue alternatives to foreclosure. And in cases where modifications cannot create a credible and sustainable resolution to a delinquent mortgage, more-expedient exits from homeownership, such as deeds-in-lieu of foreclosure or short sales, can help reduce transaction costs and minimize negative effects on communities.