Maybe We Should Allow Foreclosures To Take Place

See Why Regulators Should Let Banks Foreclose: Data show that brief additional time-outs don't allow borrowers to become current from today's WSJ, by JOSEPH R. MASON, a professor of banking at Louisiana State University and a senior fellow at the University of Pennsylvania's Wharton School. Excerpts:

"For borrowers, delaying foreclosure only provides false hope. Today, a borrower faces a foreclosure sale only after failing to make a payment for more than a year. There is no reason to believe a brief additional time-out will allow such borrowers to become current. To the contrary, data from the Mortgage Brokers Association indicate that loans reaching the foreclosure stage almost never avoid default, and that borrowers who become 90 days delinquent cure their default only about 1% of the time.

Similarly, recent research done for the National Bureau of Economic Research demonstrates that loan-modification programs have mixed effectiveness. Data suggest that many delinquent borrowers have the means to afford their mortgage payments, but are so deeply "under water" on their mortgages that they are simply no longer willing to pay. Others have insufficient income to afford any reasonable mortgage payment."

"For neighborhoods, every day without foreclosures means another day of deteriorating home values. A recent study of the Cleveland area published in Urban Affairs Review found that neighborhood home values are largely unaffected by foreclosures that take less than a year. But foreclosures that take longer than a year have a negative impact on home values as the effects of neglect and vandalism mount."

"For banks, further delays in the foreclosure process create uncertainty in their balance sheets, potentially blocking channels of credit and undermining lending. Creditors, like borrowers, are hesitant to make new commitments until there is a resolution of the significant economic issues facing them.

One of the root causes of the economic crisis was a deterioration of underwriting standards: We stopped focusing on whether people could afford the homes they were buying. Continuing to delay foreclosures reflects the same kind of wishful thinking."