While recent news stories have focused upon the “robo-signing,” of foreclosure documents, including some allegations of forgery and fraud, a foreclosure moratorium won’t solve the problem. The securitization of mortgages and the potential processing of illegal foreclosure documents are merely components of the crisis they helped spawn; the issue that has yet to be addressed is negative equity. Until the banks and political leaders can agree upon a solution, the economy cannot begin a path towards robust growth.
The packaging of mortgages and Wall Street’s insatiable thirst for more—more profits required that more mortgages be created, causing banks to generate addtional products doomed to failure; and they were readily offered to an eager public. But punishing those banks for their faulty handling of foreclosures and demanding that they develop new procedures for processing defaulting loans still leaves the nation with billions of dollars in mortgages that will ultimately end in foreclosure. And until the affected homes are either sold in foreclosure or stabilized with a “workable” modification, both the housing market and economy will continue to suffer.
It’s not that some foreclosures haven’t been improperly handled, and it’s not that some homeowners haven’t been wronged in the process; but the majority of the homes in foreclosure are there because the owner is either unable or unwilling to maintain their mortgage payments. Homeowners with no hope of salvaging their mortgage should be moved through the foreclosure process as quickly as possible; but all should first be reasonably evaluated to see if they qualify for a loan modification or short-sale—analysis which, to date, has been less than effective.
There is no justification for the actions of our largest banks which have been more focused upon profit than abiding by the letter of the law, and their handling of foreclosures has only served to point out yet another instance of their poor judgment. However, focusing upon the behavior of banks ignores the core problem. Certainly those institutions that have broken the law should face severe penalties, but neither a foreclosure moratorium nor a revamping of the process addresses the issue that continues to weigh down our economy. In order to begin to restore the housing market, we must find a way to keep more homes from foreclosure.
Studies have shown that underwater homeowners will more likely default because of high interest rates and payments rather than the impact of negative equity; and many underwater loans could be salvaged through a program of realistic loan modification. Current attempts haven’t worked because the modifications offered were not financially viable, with the reset payments far exceeding the ability of most owners to pay over time. Creating a workable system would require a cooperative effort from both the banks and government.
With more than 13 million homes with negative or near-negative equity, and with approximately 7 million 
homeowners currently at least 30 days in default, it’s easy to see that a foreclosure moratorium won’t solve the problem. Foreclosure-gate has only distracted us from a looming crisis, and the sheer magnitude tells us that the issue won’t just disappear. The foreclosure problem must be addressed. Punishing the banks may provide temporary gratification, but when the attorneys have all gone home, the fines and settlements paid, we’ll still be mired in a housing problem which, like a gigantic millstone, drags down our economy.
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