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Tuesday, October 12, 2010

The Consequences of the Foreclosure Freeze

It's likely to become the biggest business story, if not the biggest story period, of 2011. What will happen as a result of the massive mess created by the sloppy process by which banks foreclosed on properties? Already three banks have made foreclosure moatoriums in about half the states. More are likely to come. A handful of state AG's are considering charges and more will come.

The first impact is economic. Such a freeze on foreclosures will remove properties that need to be sold from the market.This will create a disequilibrium between supply and demand. There are few buyers and so prices will need to come down but with these properties being held out of the market prices will stay up artificially.

Second, the one area of real estate that's moving will freeze. About the only people making money in real estate were those that focused on foreclosures. Whether they were realtors, mortgage bankers, buyers, or attorneys, there has been plenty of money if you captured the foreclosure market. That will be no longer. Without that moving, nothing is moving.

The most potentially devastating is the potential moral hazard. The biggest problem with a successful loan modification process would have been that it encouraged more people to fall behind on their mortgage. After all, you only get a loan modification if you are behind. That never materialized. Now, we are facing a similar dynamic. Mass freezes on foreclosures mean that people have little to fear about falling behind on their mortgage. There is now little incentive to pay your mortgage. Banks have proven that when push comes to shove, they almost never can prove they have a right to take your home. So, why pay? There is no punishment.

Finally, no one will talk about the main problem, too much paper work. Too much paperwork was partially responsible for causing the crisis. Now, it's largely responsible for causing this crisis. Yet, we passed a massive financial reform bill that will expand paperwork exponentially.


AG said...

These banks are going to be fighting off Actions to Quiet Title for years. Lots of people are going to find themselves with free houses. And Congress won't be able to bail the banks out this time.

xformed said...

So here's the dilemma: People signed for the mortgages. Sloppy paperwork in the selling/transfer of the titles/loan docs have left the argument Bart Simpson argument ("you didn't see me, I wasn't there") defense, while the lawyers and the people know, they really did sign a piece of paper saying they were responsible. If not, then these same people must agree the "alleged borrowers" stupidly just sent checks to some bank/mortgage company for years, without realizing they had no obligation to do I said, they sided, they committed, and now they want a free place to live.

What bothers me is the widespread acceptance of just letting people make the argument that they aren't obligated, and further, because they aren't they get to keep the house for free.

It's insane that this is happening. It's like Imminent Domain in reverse gone wild. Instead of the Government taking over a property, it's the courts saving people get to keep what they haven't been paying for.

You're right. It will decimate the economy. The bad part is, the logical outcome is that some houses are more equal than others, and when someone who is "behind" gets to keep their even now valued multi-hundred thousand dollar home, while some one who just got a $54K home "for free" will wonder how they have be dissed by the system for not letting them have such a windfall.

Social tension. I do know one person deep in the market selling short sales. This will end. She has some hellacious stories of what sellers are trying to do to stay as long as possible.

This will do us no good, but it will advance the entitlement crowd, who, I predict, will keep pushing for "equality" of housing, which will just divide us more.

They laugh about "Going Galt." Won't be so funny when everyone does a mass sit in at their homes and on their check books. Will the Feds step in and garnish your wages and transfer the money to the mortgage firms? Not going to be pretty at all.

Stop Foreclosures said...

Well I hope lots of people can get rid of this. Even foreclosure freeze now takes years to become a suitable solution.