Imagine a highway held up by traffic of slow moving vehicles. That is the position of the housing foreclosures break down: thousands of properties holding up the highway of the housing market.
The break down is mainly because of the large volumes. There are too many defaults on mortgages. Looking back a decade ago, there were very few cars stuck in the highway. Some borrowers were delinquent on mortgage payments and as a result lenders foreclosed on them, in a process complying with the law. The congestion built up with the coming in of toxic mortgages that had impossible terms. Then, there was a rise in unemployment and the traffic of defaulting properties soared. A huge amount of properties broke down on the highway, which proved difficult to handle for the lenders.
Recently, 50 State Attorneys general have cried foul and launched an investigation into the foreclosures procedures. Lenders announced a temporary freeze on thousands of foreclosure properties. The bone of contention is the foreclosure process. Lenders did not follow legal procedures before mortgages were sold and resold mostly lacking the required paperwork.
However, the basic problem was not lenders swindling and evicting homeowners. It had more to do with borrowers defaulting on their mortgage payments. Their properties had legally entered the foreclosure break down road.
In the various investigations into the mound of foreclosures, we are ignoring the harsh truth about millions of homeowners defaulting on their mortgage payments. Banks cannot sell them, make good their losses and restore the inventory in the market. Also till lenders come out with legal but efficient ways of dealing with foreclosures, houses that need to be foreclosed upon stall the highway of housing market.
The declaration of moratorium on foreclosures seems to be a chance for desperate homeowners giving them more time to stay in their homes. But a continuous pile-up delays any recovery in the housing market. The pile-up also threatens the whole economy hastening fears of a double dip recession.
Today, 30% of all home sales are accounted by foreclosures. The low interest rates create a good market for these properties. Delaying the marketing of such properties would hurt potential home buyers.
It is time to review reform of bankruptcy procedures. Investors and servicers have failed to deal with the tide of foreclosures. Struggling homeowners have defaulted not only on their mortgages, but also on credit cards and car loans.
Finally, what really matters to homeowners is employment or jobs. A reprieve of foreclosure may buy them time to stay on in their homers, but in the long run, the buildup of properties on the foreclosure highway will adversely affect economic recovery and creation of jobs.
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