Fighting Foreclosure Fatigue
Folks in Washington tell me there is a general sense of “foreclosure fatigue” in our nation’s capital. It’s just so boring to keep thinking about all the people losing their homes year after year. Can’t we move on to something new? This attitude goes along with a failure to do anything meaningful to get out of the five-year-old mortgage crisis, still very much with us. More charitably, the people who would like to do something see no political opening in an election year.
Looking back on all that time, there has been no shortage of good ideas; what has been lacking is will. Remember principal write-down in bankruptcy (aka, cramdown)? Peter Swire, who coordinated housing finance policy at the National Economic Council in 2009-2010, recently admitted that the administration should have pushed for it early on. “Cram-down, on balance, today, would have been a good idea,” he said.
But there is still floating around the idea of the principal paydown plan in chapter 13, which could be implemented by the Federal Housing Finance Agency. But remember Ed DeMarco . . . here, here and here.
If it is hopeless to do anything on the federal level now, how about local initiatives? Just this week, Robert Shiller (of the Case Shiller price indices) in a New York Times piece promoted state and local government efforts to use eminent domain to seize underwater mortgages, pay their fair market value, and then write them down, making new loans for the public purposes of stabilizing the housing market and reducing blight caused by vacant homes.
There is plenty of reason to develop some will for action. It should not go unnoticed here that both foreclosure starts and repossessions went up in the most recent monthly report of Realty Trac. Foreclosure starts in May resulted in the first 12-month increase nationally in more than two years. The highest rates of foreclosure activity, from one in 300 to one in 340 housing units, were, in order, in Georgia, Arizona, Nevada, California, Illinois, and Florida. The top three metro areas for foreclosure starts, in order, were Riverside, CA, Atlanta, and Phoenix. So not surprisingly, the idea of using eminent domain seems to be most seriously under consideration in San Bernardino County, CA, near where Riverside is located and where foreclosure activity is also elevated.
For any local effort using eminent domain, there are at least two legal issues—whether eminent domain can be used to take intangible property such as mortgage notes and security instruments (including mortgages themselves and deeds of trust) and whether taking the property in question to deal with the mortgage crisis is somehow covered in state law as a public purpose. The California law on this seems to be already in place; a quick look at the Arizona statutes on eminent domain did not suggest to me that the idea could be implemented to deal with the Phoenix mess without new legislation on public purposes, and I am not holding my breath for that to happen. But maybe an expert on Arizona law of eminent domain would conclude otherwise.
As noted, not just foreclosure starts, but also bank repossessions were up in May. Recent increases in short sales indicate many of the new foreclosure starts will not end in foreclosure sales. But short sales are still distressed sales, and, in general, more distressed sales make for more softness in the housing market; short sales are better than foreclosures, but they still exert downward pressure on housing prices.
The biggest reason for the pick-up in foreclosure activity nationally may be that major banks were holding off during the negotiations over the national mortgage settlement, finalized in March. Now servicers have clear guidelines on process. If the settlement actually meant a big increase in modifications, we might expect a reduction in foreclosure starts. Under the settlement with 49 state attorneys general and the federal government, Chase, Bank of America, Citigroup, Wells Fargo, and Ally/GMAC are supposed to offer at least $10 billion in principal reduction over the next
three years. Some lucky homeowners are getting offers out of the blue, see here, but there is no application process for principal reduction mods and numbers on their production have yet to be released. Foot dragging on mods . . . reminds me of something, HAMP, so 2010. Feeling a yawn coming on? Fight it.
An earlier version of this post erroneously identified Riverside as part of San Bernardino County, when in fact Riverside is in Riverside County and San Bernardino County is nearby. Both areas have high foreclosure activity.