NCPA - National Center for Policy Analysis

Delaying Foreclosures Only Adds to Pain

October 21, 2010

Re-equilibrating adjustments in the housing market are critical if home construction and the mortgage markets are ever again to become viable.  Too many people "owning" too large houses that they could not afford have acted like bad poker players -- I can't quit now, it's my money in the pot!  At last, some are accepting bankruptcy.  These methods -- foreclosures and bankruptcies -- are the best tools to bring about the price adjustments needed to restore rationality to capital markets, says Fred Smith, president of the Competitive Enterprise Institute.

And, while foreclosure documents that violate mortgage contracts or which have serious flaws should be reviewed, it is likely that in most cases the outcome will remain the same.  The owners will give up the house, the banks will write down the loan.  The sooner the better.  Unfortunately, the push by attorneys general and other politicians to offer new false hopes to those facing foreclosure will merely prolong the misery and slow the economic recovery.

It will also further destabilize capital markets.

  • Few people extend loans on nonrecourse terms.
  • Slowing further foreclosures or making them much more costly moves mortgages very much in that direction.
  • And since these mortgages tend to be securitized and sold to foreign investors, pension funds and others, this increases the political risk of capital markets more generally.
  • Avoiding homeowner losses is all too likely to increase many other losses elsewhere in the system both now and in the future (as capital availability declines further).

Using the foreclosure crisis to further delay housing market adjustments will exacerbate the situation.  And if these actions push even more financial firms into disaster (local, state and private pension funds are already in trouble), then we may face another political and economic destabilizing wave of bailouts and a further lengthening of the recession, says Smith.

Source: Fred Smith, "Delaying Foreclosures Only Adds to Pain," October 18, 2010.

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