Everyone: can we all chant in unison, "Yes, We Can!"?
We can? Cool!
I'm not talking about Barack Obama, I'm talking about a federally-mandated 90-day foreclosure moratorium. The kind being pushed by Chris Dodd. The kind being pushed by "The Governator" in California and already enacted in other states. The kind that scares the pajamas off of mortgage loan servicers (free registration required). With Obama in the White House, the prospects for all of the pet projects of the Democratic powers-that-be in the Senate and the House look so much brighter.
With pressure mounting for Congress to enact a 90-day moratorium on home foreclosures, mortgage servicers are warning that the move could
have the perverse effect of prolonging the housing downturn.
"A
foreclosure moratorium would make a correction take much longer and
have unintended consequences on servicers who already have liquidity
constraints," said Dennis Stowe, the president of Residential Credit Solutions, a buyer and servicer of distressed mortgages.
Here's the problem for loan servicers: mortgage servicers advance delinquent loan payments, costs of collection, and foreclosure costs. They recoup those costs when the loan goes into foreclosure, and by delaying foreclosures, you increase the amounts of advances that servicers must make. To fund those advances, servicers are borrowing on their own lines of credit, and paying interest on those advances. That's good for the lenders who fund those advances, but not good for the servicers.
Critics like Senator Dodd, and his bitty buddy Barney Frank in the House, argue that servicers are deliberately forcing loans into foreclosure to limit the time during which they must make advances and to more quickly recoup the advances made (limiting their own financing costs) and, it is alleged, to pile on fees for additional foreclosure-related services. Rep. Frank has been especially critical of the fact that servicers aren't responsive to loan modification requests made by delinquent borrowers and, when they have them, the borrowers' representatives. That criticism appears to have a basis, but it seems due more to lack of staffing than it does to malice.
[Matt Stadler, the CFO of a servicer of distressed loans,] likened the state of the servicing industry to the "I Love Lucy" episode in which Lucy is furiously grabbing chocolates off a fast-moving conveyor belt.
"The borrowers are just piling up, and servicers are inundated and overwhelmed with calls they can't answer, short sales they can't complete, and not enough staff," he said. "They need more manpower."
If Matt had only had more time to parse the nuances of his last statement, I'm certain that he would have opted for a more politically correct contention, that what is needed is "more person power." You need to jump on board with the new world order, Matt, or the folks who will control two of the three branches of the federal government come next January will be screaming at folks like you: "No, You Can't!" And since you're fond of references to the old "I Love Lucy" show, hear me now and believe me later when I say to you that "you'll have some 'splainin' to do."
It's not likely that a moratorium will suddenly free up gazillions of servicing personnel who handle foreclosures and who will then miraculously be transformed into skilled loan modifiers.
When delinquency rates were below 2%, servicers mainly acted as collection agents, making automated phone calls to defaulted borrowers. As delinquencies rise, many loss-mitigation specialists lack the skills to handle the complexities of offering options to borrowers, Mr. Stadler said.
Demand outstrips supply. We've previously suggested that since bureaucrats and politicians have all this figured out, they should simply volunteer their staffs to make up the loan workout personnel shortages. Obviously, the government workers haven't got enough to keep themselves busy, inasmuch as they've plenty of time to meddle in matters that are well above their pay grade. Like running the residential mortgage loan industry.
As we and others have repeatedly pointed out, delaying foreclosures simply delays the inevitable, while compounding the ultimate losses. There's a certain element of "magical thinking" that goes into assuming that a 90-day foreclosure moratorium will somehow resolve a foreclosure crisis; that all those foreclosures-in-process will be transformed into loan modifications or refinancings because...well...just because! Let's face it, if a borrower's broke today, he or she is likely to be just as broke 90 days hence. Also, as Mr. Stadler observes, "[a] moratorium doesn't fundamentally change anything since many of these borrowers in the late stages of default have already abandoned the property."
More often, servicers put borrowers on repayment plans, which let borrowers catch up on arrears over six to 18 months. Unlike modifications, these plans are not restricted by investor requirements.
A crucial problem is that many loan modification agreements ultimately fail. "It's well known within the industry that modified loans have a recidivism rate of 50%," said [Keefe, Bruyette and Woods chief equity strategist Fred] Cannon.
Then there are the long term effects of a foreclosure moratorium to consider. An analysis recently released by David Wheelock of the Federal Reserve Bank of St. Louis alleges that those effects upon borrowers are not good.
During the Great Depression, state and local governments responded
to the rise in mortgage foreclosures primarily by changing their laws.
Several states enacted temporary moratoria on foreclosure, while others
made permanent changes that limited the rights or incentives of lenders
to foreclose on mortgaged property.
Wheelock's report shows that 27 states adopted foreclosure moratoria during the Great Depression, particularly in the Midwest.
[...]
“Although the economic and societal benefits of lower foreclosure
rates are difficult to measure, research shows that the foreclosure
moratoria of the Great Depression imposed costs on future borrowers.”
He cited several studies that suggest foreclosure moratoria tend to
encourage lenders to reduce the supply of loans and may lead to higher
average interest rates for subsequent borrowers.
"The evidence from the use of foreclosure moratoria during the Great
Depression demonstrates how legislative actions to reduce foreclosures
can impose costs that should be weighed against potential benefits,"
Wheelock said.
Evidence? Congress don't need no stinkin' evidence! This freight train's barreling down the tracks and facts and statistics will end up blown aside like a station wagon load of nuns stuck on the tracks and praying for mercy. The Dodd-Frank express stops for no obstacles and refuses to be derailed. Obey the signals at all road crossings!
A national foreclosure moratorium: Yes We Can!