Speed up foreclosures to fix the housing market? How heartless is that? Many, like Senator Merkley of Oregon, believe that the administration should do more to prevent foreclosures:
WASHINGTON — Sen. Jeff Merkley (D-Ore.) sent a letter to President Barack Obama on Tuesday urging him to address the nation’s devastating foreclosure crisis as part of a new plan to create jobs.
“We can and should adopt an aggressive strategy to reduce foreclosures nationally,” Merkley wrote. “There are as many as 5 million foreclosures anticipated to come — this is a huge tragedy for individual families but it is also a drag on our communities and our economy.”
There are other voices now though that are suggesting a different strategy. They are saying that the way to fix the problem is to speed foreclosures up. From CNN this morning:
NEW YORK (CNNMoney) — If the Obama administration really wants to save the housing market, it should speed up the foreclosure process — not prolong the inevitable, experts say.
Four years into the housing crisis, the real estate market is still teetering on the edge. The Obama administration has tried one program after another to stem the tide of foreclosures with limited success. And it is continuing to look for ways “to ease the burden on struggling homeowners,” though no new initiative is imminent, the White House said this week.
But some housing experts argue that the administration should go in a different direction than it has in the past. Instead, they say it’s time to focus on pushing many of those delinquent borrowers through the foreclosure process and putting foreclosed properties back into use.
While some of the 2.2 million loans in foreclosure can still be saved, many are too far gone, they say. Some 37% have not made a payment in more than two years, while another 34% have not made a payment in 12 to 23 months, according to Lender Processing Services.
“Loans enter into foreclosure, but never come out,” said Thomas Lawler, founder of Lawler Economic & Housing Consulting. “If this keeps going on, you have a continual overhang that never goes away.”
Delaying foreclosure increases the percentage of homeowners who’ll likely never catch up, Lawler said. In 2009, only 6% of delinquent borrowers were more than two years behind. And it means vacant properties still in limbo could fall even further into disrepair, hurting the value of the surrounding housing market.
Forbes had an article this morning describing how the process of REOs turning into rentals is “organically’ improving the housing market:
Yes, we have a very large supply of foreclosed homes courtesy of a wrenching, multi-year housing recession. And home prices are still falling. But the flip side of the horrible purchase market is a booming rental market. Rental supply is reportedly as tight now as it was prior to the recession, and effective rents are estimated to rise 4% this year. Likewise, the foreclosure epidemic is converting lots of homeowners into renters, thus increasing rental demand.
Investors smell a distinct opportunity here: the chance to buy an asset cheaply and rent it out dearly. About 30% of the purchases of existing homes this year have been going to all-cash buyers, the bulk of whom are real estate investors. For the most part, these have been small, private investors buying properties one by one with the intention of leasing them out.
This natural market dynamic does seem to be making some headway. In the second quarter, Fannie sold more REO properties than it acquired. That means its REO backlog has finally started to subside. In fact, the combined inventory of REOs owned by Fannie, Freddie and the Federal Housing Administration (FHA) declined at the end of the first quarter compared to the previous quarter.
I’m not as convinced as Forbes that the foreclosure pipeline has slowed due to improvements in the market. Judges are getting more particular about lenders having the proper paperwork, so the process has slowed down. Banks also have a lot of inventory. Adding to the pool and taking on additional maintenance costs is often not in their best interests. Still postponing the inevitable only slows the process.
I find it interesting that the administration is not really concerned about homelessness, but about foreclosure. That indicates to me that their concern is the banks, and not the folks that live in these homes. Note that these programs don’t address renters who might face eviction, but look for a way to keep lenders paid.
Slowing foreclosures is slowing the recovery of the housing market, which in turn contributes to a dragging economy. Sure, people should be given time to become current if it’s possible. If it’s not, postponing the inevitable doesn’t help anyone.
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I agree Jeff, Foreclosures slowing down the housing markets too. We have $5 million foreclosures to come but when? At what time? Housing Market is dooming every now and then.
Are foreclosures the issue, or is it available housing stock? Let’s say we continue to ignore foreclosures. How many extra houses are there compared to bums to fill them? Are these houses vacant or filled?
Resolving balance sheet hole-electron pairs won’t really affect a supply glut, or am I wrong on this?
Should have been done back in 2008 regardless of how it impacted the banks and capital markets. We’d be in a better spot now if we’d popped the zit and taken the pain.
I’m with Ned. A tremendous amount of time and energy has been spent trying to prop up housing prices and stop foreclosures. Higher prices means lower demand– a bad thing to do when supply is so high. In addition, keeping folks in a home they can’t afford isn’t doing them a favor. A cheaper rental is a better option for a tight budget.
During the boom, homes were built all out of proportion to demand. While there are estimates out there for the amount of shadow inventory, no one really knows, so the “bum to house” ratio is hard to determine. We can assume though that if foreclosures go through and prices are allowed to find their natural level, the market will finally heal.
The premise that delaying foreclosure cases is harmful is correct. Recovery can only happen when homes are occupied by people who can afford to pay for them.
I’m a real estate broker in Half Moon Bay Ca.
If properties are vacant or not owner occupied as a primary residence, there doesn’t seem to be any moral issue with forclosing. The properties were leveraged investments like any other and were fraught with risk. A landscaping contractor making $50K/year, ends up owning 14 houses? Give me a break. At the same time, the banks have an issue with legal procedure and no reason for them to be given a pass. There’s absoutely nothing stopping them from approaching delinquent owners and offering to accept deeds in liu of foreclosure with immunity from deficiency judgments. They clearly know this and don’t want to do it for 5 reasons I can think of quickly. First, they want to milk every last dime they can out of borrowers period; Second, they want to avoid marking the defaulting mortgages to market and bringing to light the extent of the damage to investors; Fourth, they don’t want to encourage borrowers who can pay to ask for principal reductions; Sixth, they are praying that a bottom will form in the real estate market and that everything will start getting better.
I agree that getting to a realistic “bottom” is going to be key to getting real estate rolling again.
I can also see how a more violent transition to the bottom wouild probably involve an “overshoot” on the low side, so there is a case to be made for moving more slowly.
Offering principal reductions to all might make sense, but what would the reduction be? Who decides what fair market value is? and who decides who gets the benefit of increases or decreases in real estate prices/values?
This is a lot tougher probelm tha most people realize.
Jailing the banksters who supported creating the situation seems to have no downside.
Seems like jailing the Realtors who sold buyers an investment by telling them “Real estate only goes up,” “Buy now or you will be priced out forever.” and other financially devastating lies would also be appropriate.