Posted on Friday, November 5, 2010
A new poll released by the Washington Post shows that just over half of Americans, and two-thirds of Democrats, believe that the government should impose a temporary moratorium on foreclosures. On the eve of an important election, the White House is definitely caught in a bad spot.
Someone needs to say it -- a government-mandated foreclosure moratorium is a bad idea. It's a great populist message, but it creates new problems without solving the real underlying issues. What we should be focused on is achieving a balance between protecting individual consumers in the short term and protecting all of us in the long term, by defending the integrity of the law and the stability of the market.
Some lenders committed outright fraud. Many lenders engaged in indefensibly sloppy recordkeeping. Some lenders have made serious mistakes, like changing the locks on homeowners who weren't in default. None of those sins should be forgiven. To the extent those actions violate the law, the guilty lenders should be held accountable.
But here's a key point -- every loan wasn't fraudulent. Every lender wasn't a crook. Many of the foreclosures currently pending are perfectly legal. A temporary moratorium would not only unfairly hinder lenders who played by the rules, but would damage buyers planning to close on a house in foreclosure, and could result in homes remaining vacant longer.
More chillingly, a government-mandated foreclosure moratorium, if such an action could be taken legally, would suspend the operation of contract law for political purposes. Such drastic action sends a terrible message to potential investors in the American housing market. If we want the economy to work again, we need capital to flow freely. Undermining the integrity of American contract and mortgage law, even temporarily, will drive up the cost of capital by increasing the perception of risk to investors. That's just a bad idea.
The real question that we should be asking is - in this economy, why are lenders pursuing so many foreclosures? We know that there aren't buyers for all of those homes. In many cases, it just makes good economic sense to keep a defaulting homeowner in the house until a buyer can be located. An occupied home is less likely to suffer damage, and cause problems for the neighborhood, than a vacant one. What's going on? Why are lenders acting contrary to their own economic self-interest?
One problem is that "lenders" aren't calling the shots. The real owners of significant numbers of home loans are pension funds, insurance companies, mutual funds, and the government. The entities that we call the "lenders" -- Bank of America, GMAC -- are in many cases just the servicers on the loans. They earn a fee based on the services that they provide to the institutional lenders and investors. In plain English -- it appears that the servicers (at least in the short term) make more money if they foreclose than if they don't. Their contractual economic incentives aren't aligned with what's best for the true owners of the debt, the homeowners, or the general public.
So rather than calling for a foreclosure moratorium, which is an overly-broad solution that creates a cascade of other problems, the government should address these mismatched incentives to servicers and how they can be realigned. We need to protect homeowners. We also need to protect the housing market, neighborhoods, potential homebuyers, and yes, even innocent lenders. Let the courts do their work sorting out the pending foreclosures. Let the attorneys general investigate lender violations of law. Let the government focus on the systemic incentives that cause lenders to pursue foreclosures that don't make sense for anybody but the servicers. Tanya D. Marsh, Asst. Professor, Wake Forest Law School