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Would A Foreclosure Moratorium Be 'Very Damaging' To Homeowners?

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The Obama administration is resisting calls for a national foreclosure moratorium amid a foreclosure fraud scandal that has already forced some of the nation's biggest banks to halt foreclosures in every state. Stopping foreclosures, the administration argues, would be bad for homeowners.

"A national moratorium would be very damaging to exactly the kind of people we're trying to protect," Treasury Secretary Tim Geithner said on Wednesday, "because the consequence of that would be in neighborhoods that have been most affected by the foreclosure crisis, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living longer with houses unoccupied, with more pressure on their house price with the people still in their houses."

Wall Street agrees: "It would be catastrophic to impose a system wide moratorium on all foreclosures and such actions could do damage to the housing market and the economy," the Securities Industry and Financial Markets Association, a Wall Street lobbyshop, said in a statement. "It must be recognized that the mortgage market, investors and the health of the economy are all inter-related. Investors in the housing market--including American workers with pension funds, 401k plans, and mutual funds--would unjustly suffer losses in their savings from these actions."

Bank of America, JPMorgan Chase, and Ally Financial have temporarily halted foreclosures after so-called "robo-signers" admitted they did not verify information in thousands of foreclosure documents they signed. Congressional leaders, including Senate Majority Leader Harry Reid (D-Nev.) and House Speaker Nancy Pelosi (D-Calif.) have asked for moratoriums and investigations.

Regardless of the overall trajectory of home prices, consumer advocates said the most damaging thing for homeowners is the current situation. Dean Baker, co-director of the progressive Center for Economic and Policy Research, said in an email to HuffPost that the threat of a foreclosure moratorium would give homeowners leverage to win mortgage modifications while doing nothing to hurt banks.

"If a bank realizes that it will have to spend a lot of time and money cleaning up its paperwork to go through a foreclosure it may suddenly get more serious about offering a modification that will people to stay in their home," wrote Baker in an email to HuffPost. "Also, even if that doesn't happen, homeowners may be able to stay in their homes (rent and/or mortgagefree) for another 2-3 months while the banks get the paperwork in order. What's the down side for the homeowner?"

As for banks, Baker calls bull on fears that a moratorium could have catastrophic consequences. "The fact that the banks say a moratorium would be catastrophic should be taken as having absolutely zero value. There are few people on the planet with less credibility," Baker wrote. "For the last two years everyone familiar with the housing market has been talking about the 'shadow inventory.' These are the hundreds of thousands of foreclosed homes that banks have deliberately kept off the market. The reason is presumably that they were worried about glutting the market with foreclosed properties, depressing prices even more."

Ira Rheingold, director of the National Association of Consumer Advocates, told HuffPost that a moratorium "is neither damaging or particularly helpful to homeowners."

"What's damaging homeowners is the failure of Secretary Geithner and others in the administration to hold the servicers accountable for breaking the mortgage system and for violating the law. What's damaging is Treasury's failure to create and mandate a loan modification program that would actually help homeowners stay in their homes and stabilize their communities," wrote Rheingold. "What would be helpful would be the imposition of this necessary timeout so that servicers can use this time to learn how to comply with the law and Treasury can finally figure out a solution to the problem of hundreds of thousands or millions of unnecessary foreclosures."

(Despite the self-imposed moratoriums by Bank of America and JPMorgan Chase, foreclosures have continued in Florida, according to news-press.com in Fort Myers.)

Alan White, a professor at Valparaiso University Law School, wrote in a blog post that the Obama administration is using the robo-signer scandal as a "scapegoat" when the real crisis facing the housing market is the the more than five million mortgages in default or foreclosure.

"If every bank and servicer called off its moratorium today, and if all the state Attorneys General went away, we would simply go back to the agonizing process of dumping another 100,000 or so foreclosed properties on the market every month, while homeowners who want to make payments wait for months to get their workouts processed. Before the foreclosure fraud scandal hit we were already facing another five years of depressed and uncertain home prices, even assuming more homeowners now making payments don't start falling behind."

Industry analyst Sean O'Toole, founder of ForeclosureRadar.com and a critic of the Obama administration's approach to the housing crisis, said he agreed with Geithner that a moratorium would be damaging -- but he said a moratorium would exacerbate problems created by recent accounting-rule changes and programs like HAMP.

"The reality is that foreclosures are at an all time low as a percentage of delinquencies thanks to these policies which together allow banks to delay foreclosure and inflate assets," wrote O'Toole in an email. "Clearly servicers should be required to follow foreclosure laws, but we need to keep in mind that one of the primary things plaguing the housing market at this point is uncertainty. Buyers are worried about shadow inventory, foreclosure waves, and when the bottom will be reached. These delays increase that uncertainty and hurt the housing market far more than they help."