Foreclosure caution? Of course. Halt? Please don’t!

I have had occasion over the past couple of years to say “please stop helping” about a number of government programs aimed at “fixing” the housing industry — two rounds of homebuyer tax incentives that significantly distorted market forces and ongoing demand patterns, a program to “help” banks modify mortgages (where most borrowers couldn’t qualify at all and up to 75% of those that did failed almost immediately to make their new, lower payments); a program to streamline the short sale process that didn’t; etc., etc.

Now, several major banks have announced that they are stopping new foreclosures while they verify the supporting paperwork.  I am absolutely behind them getting this right.  There is no doubt that with the acquisition and consolidation of mortgage lenders and mortgage portfolios over the past several years, there is more than a little confusion. 

I had several personal experiences with misguided bank actions including one of my worst a couple of years ago:  one of my listings — not a short sale but a seller behind on payments and netting zero $ — sold in October 2008.  The transaction was closed, mortgage retired, sale recorded, title transferred.  Then the house showed up on the calendar to be sold on the courthouse steps on the first Tuesday in January — two full months later!  It seems the “payoff” department at this major bank forgot to tell the “foreclosure” department when it was time to stop.  We got that straightened out in the nick of time, but it just can’t be the only similar story.

So, should the banks get their act together?  Absolutely!

But, last week I heard a prominent Senate leader suggest that there should be an across-the-board moratorium on all foreclosures.  Other politicians seem to be supporting this move.  All I can say is STOP before you help us any more!!!!!

This moratorium would send several messages:

• Give homeowners that are already behind on their payments a free pass for the duration of the moratorium.  (And maybe encourage some that are struggling with payments to “take a breath” for a few months.)
• Prevent banks from acting when they know that the case for foreclosure is real and that all the i’s are dotted and t’s are crossed.
• Tell many (most?) prospective home buyers to pull out of the market for at least six months, because there will be a flood of “cheap” properties on the market at the end of the moratorium.
• Tell many (most?) prospective home sellers to hurry up and get their houses on the market — get them sold before that flood of cheap houses hits the market in a few months.

Result:  Inventory build-up while demand dips, more downward price pressure in most markets, more foreclosures, and an avalanche of bad news when the moratorium ends.

As a political tactic, proposing a moratorium might make sense.  As a business strategy, it is a monumentally bad idea.  The housing market needs to heal in order for the rest of the economy to recover.  It may be ugly now, but it will be uglier if we drag it out.  Let’s just get it over with and get back to work!