August 18, 2011
Across the United States, foreclosure filings in the first half of 2011 were down nearly 30 percent from filings in the first six months of 2010. Unfortunately, the drop in foreclosures is not a sign of improvement in the mortgage market, but rather a reflection of the delays in filings, says Economic Policies for the 21st Century.
- The pace of foreclosures is likely to remain slow until large banks reach an agreement with government officials that establishes new loan servicing and foreclosure standards.
- The delay in foreclosures increases the "shadow inventory" of properties likely to be auctioned by banks.
- This not only increases supply and depresses future prices, but also contributes to the current price reduction trend as potential buyers rationally delay purchases until new supply comes on line.
- More ominously, the proposed resolution to the foreclosure mess may make it less likely the private sector will ever return to the home mortgage market.
Last year, it was revealed that servicers had improperly signed off on potentially hundreds of thousands of foreclosures. The volume of seriously delinquent loans was simply too great relative to the legal requirements and the servicers decided to take short cuts. These short cuts have now triggered tens of billions of dollars in civil liability.
- If the government is ever to extract itself from its dominant position in mortgage finance, it will have to make the asset class more attractive to potential investors.
- If lenders cannot access the collateral used to secure the loans because of new foreclosure delays, or later discover that their rights to that collateral have somehow become partially subordinated to a second lien, it is unlikely that discretionary risk capital will flow to finance mortgages at anything approaching current rates.
- Much of the desire today by government to help borrowers stay in their homes is noble, but it's also likely counterproductive.
Source: "Foreclosure Madness," Economic Policies for the 21st Century, August 8, 2011.
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