CNBC has this article up this morning decrying the politics of foreclosure. Yes, it is political. But look at the nonsense of his argument.
Yes, the process is flawed because the banks clearly aren’t equipped to handle the numbers.
Yes, there may be some loans that could have been saved, but the vast majority can’t.
Still lawmakers want to freeze all foreclosures to make sure all of them are fair because, as Speaker Pelosi writes, “People in our districts are hurting.”
The question is, how much would a foreclosure freeze hurt the greater housing market?
What do these questions have to do with it? Either there is a legal process and the banks spend the money to follow it, or they bear the consequences. That is free market capitalism. So far, no one has proposed a new law or regulation. They are just asking the banks to follow the laws that were in place when these mortgages were originated and sliced and diced into securitized assets. If it now costs more to process the risks that were in those portfolios, the folks that made the bets should pay the costs. Simple and elegant.
I asked some mortgage mavens and got the following responses:
Josh Rosner, Graham-Fisher: With REO sales being a large part of supply we would see home prices artificially and unsustainably rise, foreclosure volumes paint a false picture of stability and investors in MBS would be further harmed as their losses grow. Once the moratorium ended prices would fall and foreclosures would skyrocket. But, it would paint a prettier picture than reality heading into mid-term elections. 14 here. This is nonsense. Nothing much will change before the mid term elections. Red Herring.
Guy Cecala, Inside Mortgage Finance: Instead of having a ton of mortgage borrowers who haven’t made any payments in at least a year, we would have a ton who haven’t made a payment in a year-and-half. Keep in mind we will have new problem loans entering the system throughout any moratorium whether we acknowledge them or not. Do we seriously believe that a foreclosure moratorium can change the outcome of potentially 5 million or more homeowners losing their homes over the next two years? Ultimately, if we don’t do something to handle distressed properties more efficiently (and faster), the housing market is going to remain stuck in limbo with no recovery in sight. 14 here. So we trample legal rights to process distressed assets efficiently? That is a slippery slope.
Janet Tavakoli, Tavakoli Structured Finance: Banks are vulnerable to lawsuits from investors in the [securitization] trusts. This problem could cost the banks significantly more money, which could mean TARP II.
Is this really so bad that we will need TARP II? That seems like fear mongering. The lawsuits will drag out for years and will not cause a sudden collapse of banks unless people figure out the banks are not solvent anyway, in which case we need to clear the banking market the way they suggest we clear the real estate market. Then we can capitalize a new banking sector. If $700 Billion were put into capitalizing new banks, we would not need to old banks at all. Let them wind down.