President Elect Barack Obama and others have advanced the idea of a short-term moratorium on new home foreclosures, across the board, after he takes office in January.
According to some experts - there is danger in this move!
The overwhelming majority of us are far too young to remember The Great Depression and the 1930's. But many of us remember high rates of inflation during the 1970's.
Richard Nixon, then President, attempted to stymie inflation with a couple of Price and Wage Freezes. But they didn't really work to the advantage of consumers.
Indeed, short-term price and wage freezes resulted in significant price increases after the freezes expired. Further, some manufacturers, seeing their profit margins curtailed somewhat, produced less in the short term, and that move exasperated catch-up increases later.
Some feel a short-term halt to foreclosures could have a chilling effect on the mortgage market after the moratorium expires. Lenders, seeing the potential for reduced payback on loans they issue that go bad, may be hesitant to make new loans in as great numbers. Or, they may add fees or new conditions on these loans. This could hamper the ability of many to buy a new home, or refinance their present one.
David E. Wheelock, an Economist with the Federal Reserve Bank of St. Louis, studied the moratoriums on farm loans that 27 U.S. states enacted during the Great Depression. Subsequent lifting of the foreclosure moratoriums resulted in lending rates "significantly higher" than before the freeze, and mortgage money was harder to come by. (Wheelock studied farm loans, since data on home mortgages during the 1930's was not complete or detailed.)
Said Wheelock, "When you bailout borrowers under one circumstance that will have costs on future borrowers." Lenders in the Depression Era demanded a premium on loans they subsequently made - putting a big crimp in further recovery efforts.
Will there be a similar negative effect if such a moratorium enacted early next year? Perhaps not, but such an action would have to be structured properly to avoid such risk.
For more, see our post today @ BlogChicagoHomes.com, with a link to a post by Michael Corkery in The Wall Street Journal Developments Blog from last Tuesday, November 4th.
DEAN & DEAN'S TEAM CHICAGO