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.