Federal housing promotion policies over-stimulated the supply and demand for housing and that destabilization continues. Efforts to make home ownership a “human right” are partly responsible for our financial crisis – with too many people owning houses that are worth too little. Prior to the foreclosure crisis, housing markets seemed slowly moving back toward equilibrium. Construction was down, sellers were lowering prices, and banks were moving to foreclose mortgages in default. Since little has yet been done to eliminate the housing subsidy, these trends have been far too slow. Congress and the Administration continue to keep one foot on the gas pedal, while reality is slamming on the brakes.
Still, it did appear that at last housing markets were re-equilibrating – seller expectations were becoming more realistic, banks were beginning to move again “homeowners” in default. Since they’d been careless in expanding housing, we should not be surprised that their procedures might be equally sloppy in this reduction phase.
And those adjustments are critical if home construction and the mortgage markets are ever again to become viable. Banks already have too many incentives to exercise “forbearance.” Too many people “owning” too large houses that they could not afford have acted like bad poker players – I can’t quit now Its my money in the pot! At last, some are accepting bankruptcy. These methods – foreclosures and bankruptcies – are the best tools to bring about the price adjustments needed to restore rationality to capital markets.
And, while foreclosure documents that violate mortgage contracts or which have serious flaws, should be reviewed, it is likely that in most cases the outcome will remain the same. The owners will give up the house, the banks will write down the loan. The sooner this happens the better. Unfortunately, the push by AGs and other politicians to offer new false hopes to those facing foreclosure will merely prolong the misery and slow the economic recovery.
It will also further destabilize capital markets. Few people extend loans on non-recourse terms. Slowing further foreclosures or making them much more costly moves mortgages very much in that direction (Justice delayed is justice denied!) And since these mortgages tend to be securitized and sold to foreign investors, pension funds, and others, this increases the political risk of capital markets more generally. Avoiding homeowner losses is all too likely to increase many other losses elsewhere in the system both now and in the future (as capital availability declines further).
All this may be inevitable in any case, given Congress’ and the Administration’s refusal to correct existing housing subsidy policies, but using the foreclosure crisis to further delay housing market adjustments will exacerbate the situation. And if these actions push even more financial firms into disaster (local, state and private pension funds are already in trouble), then we may face another political and economic destabilizing wave of bailouts and a further lengthening of the recession.
The Fed and the Administration’s financial team should do everything possible to get the foreclosure system moving again as rapidly as possible. Pain delayed is pain increased!