A Guest Op-Ed from "Banker with a Conscience"
Notes from the Frontlines
We are in the process of seeing a fairly large increase in the number of foreclosed homes for sale. If there is any good news it is that the number of homes entering the foreclosure process is going down, so we can see, with some clarity, that the problem will ease off several months down the road.
Why is this happening? Should we care? There are really three factors conspiring to give us a dramatic increase in the number of foreclosed homes for sale now and in the coming months.
- The lag time between a borrower’s failure to meet their obligations and the point at which the house is ready for sale has been elongated considerably versus the pre-crisis situation. Efforts to modify loans, state and local rules that delay the process and the overwhelming amount of work faced by servicers all resulted in it taking an average of, maybe, 18 months to get a house to market. So, what we see today are homes coming to market that present borrower failures from 12 to 18 months ago—at the deepest part of the recession.
- Regulator actions to try, to be sure very late in the process, and understand and oversee the foreclosure process has resulted in additional delays of the foreclosure process and has lengthened the process time causing the “rat in the snake” to become bigger and more concentrated.
- The recent increase in interest rates and the recent declines in prices of foreclosed homes for sale (an obvious and predictable outcome of excess supply in the market) have resulted in tepid sales of such homes relative to the supply.
We should all care about this circumstance because it will further dampened our economic recovery and have a chilling effect on consumer confidence and mobility in our economy.
What should we do about this? This is fundamentally an issue of supply and demand. The supply is growing for the reasons cited above and won’t likely start shrinking towards a balanced market where demand and supply are in equilibrium for at least the balance of this year and into the first or second quarter of next year.
Policy options to deal with this situation include:
- Seriously consider reinstating the tax credit for first time homebuyers who buy existing homes. It would make sense to have this limited to homes purchased during 2011. This has increased demand in the past and would work again. Getting this excess supply off the market is good for all of us because it will get the supply off the market and allow home building to start again—increasing employment in that hard hit sector of the economy.
- Continue the policy of keeping home mortgage rates as low as practical. As rates rise it reduces demand and it also reduces the price of the housing stock and that simply puts more homes “under water” and potentially increases the number of people walking away from their home and that just makes the supply problem greater
- Encourage the regulators and legislators to “wake up and smell the coffee” on this issue. Every time they do something that slows down or stops the process of foreclosure on families that are hopelessly behind in their payments and/or have no interest in paying on their mortgage any longer, they just stretch this problem out by more months. The faster we get through this problem and get the excess inventory sold off, the faster we can get people back to work building houses for people. If we keep “kicking this can down the road” by delay, we just put off the day that our home building industry can become the engine of growth in this economy.
The unseen consequences of this problem are many. We all see the families affected by their inability to pay their mortgage debt. Clearly this is a hardship for them and no one would argue that we shouldn’t do everything reasonably practical to help them. But, from the inside view I have of this problem, I can tell you that the people getting foreclosed on today are those that simply can’t pay due to loss of job or dramatic loss of income or because they have an impossibly large mortgage because they bought much more house than they could ever afford. These are unsolvable situations and foreclosure is the only and best solution. What we don’t see are the families who are paying their mortgages but have homes that are worth less than their mortgage so they can’t move when better opportunities exist in other markets. What we don’t see are the baby boomers that have met their obligations and are ready to retire, but can’t sell their house because there is no demand. Our efforts to help the “foreclosure victims” are now impacting others and creating a new and unseen set of victims.
As tough as it is, the best solution is to get this problem behind us as quickly as possible, while insuring that any one in a home and with a loan that has the means to achieve a reasonable modification is given that opportunity. For the others (now the majority of cases) let’s quit the delaying tactics, rules and policies and get this problem firmly in the rear view mirror.
Banker with a Conscience