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Foreclosure Moratorium written by Roger

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Foreclosure Moratorium - good idea? November 5th, 2008 1:36 PM

My wife, Lori, and I were talking this morning . . . you know - the "hey, look, the sun came up this morning even though our guy didn't win the election" conversation.  Anyway, during the conversation I mentioned this article about the last time we tried a foreclosure moratorium just because I found it interesting and she responded immediately, "hey, that's exactly what our new President-elect says he's going to do" . . . and I said "Yikes" or something really cool like that.  She calmed me immediately by reminding me that Barack will surely save us if things go wrong  . . . and we both had a good laugh.

Anyway - since it's being discussed as a possible policy option, let's look back at what happened last time this brilliant idea was implemented.

Credit where due department:  The article below is from yesterday's Housing Wire website.

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History Warns Against Foreclosure Moratoria: Study

By: KELLY CURRAN
November 4, 2008

 

 

 

 

As 2008 is increasingly compared to the 1930's, it appears the nation is playing ball in the same field as the nation's greatest depression - scary, but true. A look back to the Great Depression offers evidence that imposing a temporary ban on foreclosures in response to the current financial havoc could impose unintended costs that should be weighed against potential benefits, according to an analysis released Tuesday by the Federal Reserve Bank of St. Louis.

Nearly one percent of U.S. home mortgages entered foreclosure during the first quarter of 2008, and nearly 2.5 percent of all home mortgages were in foreclosure by the end of the quarter.

But let's back up to Jan. 1, 1934 - the height of the Great Depression: As many as half of all urban home mortgages were delinquent. State and local governments at the time, responded to the increasing number of foreclosures by primarily changing laws. According to economist David Wheelock's report, 27 states opted to temporarily halt foreclosures, while others enacted permanent changes that made it more difficult for lenders to foreclose on mortgaged properties.

Wheelock noted that moratoria and other changes to mortgage laws favored borrowers over lenders, enhancing the rights of borrowers to withhold foreclosed property while limiting the rights of lenders to sue for deficiency.

"Foreclosure moratoria generally applied to both farm and nonfarm residential mortgages," said Wheelock. "However, the pressure for foreclosure moratoria was particularly intense in Midwestern states where farm foreclosure rates were especially high." Naturally, such regulations led to much lower farm foreclosure rates - but with a cost.

Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties, Wheelock argueded. "Although the economic and societal benefits of lower foreclosure rates are difficult to measure," he said, "research shows that the foreclosure moratoria of the Great Depression imposed costs on future borrowers."

Future borrowers were faced, according to the analysis and cited studies, with a restricted supply of loans and sky-high interest rates, because lenders needed to compensate for the possibility that their right to foreclose on delinquent loans would be constrained. Under the nation's current turmoil, policymakers are scrambling to enact similar regulations as were made during the great depression, in order to limit the highest foreclosure rates since (what else?) the Great Depression.

Beginning on July 30, when President Bush signed into law the Housing and Economic Recovery Act, foreclosure prevention has been increasingly pushed, as loan modification plans and programs such as Hope for Homeowners have become increasingly common. Locales including Massachussetts and local cities have sought to put foreclosure moratoriums in place; federal legislators, too, have argued

While the nation is indeed in search of a quick fix, Wheelock warns against legislative actions to reduce foreclosures and foreclosure moratoria in particular, as it may inflict a big burden on borrowers in the long run.

Write to Kelly Curran at kelly.curran@housingwire.com.

Comments (2)

Marianne Snygg
ERA Herman Group Real Estate - Monument, CO
ABR, ASP, GRI, SFR

Very interesting. I had realized that that could be an outcome of this legislation. I'm thinking that there are many others thinking that too. So, what do you think is the way to turn the economy around? Folks are thinking that it started with foreclosures and so the buzz is to start the turn around with stopping foreclosures. If not there, then where? This terrible downward sprial started with bad loans that lenders made money on. Not all lenders, I realize. But, some. And it looks like plenty, actually. So where does the turn around begin?

Nov 08, 2008 01:29 AM
Amy L. Cavender
Alterra Home Loans - Colorado Springs, CO

I don't think anybody knows right now.  The amount of money the government is putting back into the economy should raise interest rates.  There's just so much uncertainty right now. 

Nov 08, 2008 03:12 AM