Imagine a million-car pileup on the highway. Nobody moves. That's the housing foreclosure breakdown: houses stalled, waiting on the housing market highway.
The cause of the pileup, like the cause of most pileups, is volume. Too many mortgages have broken down. A decade ago, a small stream of cars stalled on the highway. Borrowers couldn't pay, went into delinquency, and lenders foreclosed, processing the act with the requisite hand-signed forms, all legally done (we hope). The influx of toxic mortgages, with almost impossible terms, that came due added to the congestion. Then unemployment soared, and the stream became a flood. Too many houses broke down on this highway too fast for lenders to follow the legally prescribed process.
Today attorneys general (and soon courts) across the nation have cried "foul," and our largest lenders have suspended tens of thousands of foreclosures. The problem is the process. Lenders did not follow the rules they had established in a calmer, less electronic decade -- before mortgages were sold, bundled, and resold, often without the necessary paperwork. However, the root of the problem does not lie with nefarious lenders swindling homeowners out of their houses. Fact is, the homeowners were not paying their mortgages. Their houses had legitimately (though regrettably) entered the foreclosure breakdown lane.
In all the investigations into the pileup, we are obscuring the harsh reality of millions of homeowners unable to pay their mortgages So the houses back up, in limbo. Banks can't sell them, recoup their losses, and put the inventory back on the market. Furthermore, until lenders come up with legal, yet efficient, ways of handling foreclosures, houses that should be entering foreclosure are similarly stalled.
It is tempting to look on the procedural moratorium as a reprieve for desperate homeowners, giving them more time in their homes.
But a sustained pileup, with more and more houses blocking this highway, undermines any housing recovery. Beyond that, the pileup threatens the entire economy, putting us in danger of the dreaded double dip recession.
Today, thirty percent of home sales involve foreclosed properties. With low interest rates, there is a market for these properties. Keeping them off the market hurts would-be homebuyers.
It is time to reconsider bankruptcy reform. Servicers and investors have failed (and, notwithstanding yeoman efforts, so has government) to address the tsunami of foreclosures. Distressed homeowners have generally defaulted not just on their mortgages but on car loans and credit cards.
Lawmakers (and regulators) could identify appropriate debt-to-income ratios and order the outstanding debts to give a priority to first- lien home mortgages. Investors (and servicers) would thus be motivated to reconsider payment terms (including reduction of principle) that would enable many owners to stay in their homes and avoid the bungled, tangled mess of foreclosure. Safe harbors could be established to create wholesale templates for servicers to restructure mortgage terms. By now, it is clear that modifying loans one at a time is putting a finger in the proverbial dike.
Ultimately, however, many of the owners, quite simply, need jobs. Without them, they are desperate. They may need subsidies just to live. A foreclosure reprieve may buy owners a few more months to stay in their houses, but in the long run, the pileup dampens the prospect for a robust economic recovery that will translate into jobs.