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Industry Insiders: Foreclosure Moratoriums Won't Work

Industry insiders clearly think that an industry-wide and legislator-led push to halt foreclosures is likely to do much more harm than good, according to the results of a recent poll of residential construction, mortgage origination, servicing, real estate sales, REO management, capital markets and investor/hedge fund managers. The informal survey, conducted by New York and Dallas-based National Asset Direct Inc., a principal buyer of performing, sub-performing and non-performing residential assets, asks key market participants for thoughts on hot-burner issues each month. A whopping 65 percent of those surveyed in November said that a national moratorium on foreclosures would have a negative or a minimal effect on the nation's housing crisis, with only 14.5 percent suggesting such a nationwide halt to foreclosure activity would be a "significant" positive. A sampling of responses from participants, whose identities are kept anonymous, is telling. “Moratoriums without a plan to help needy homeowners will only create a bigger problem," said one respondent. "Lenders with minimal loan qualification criteria and irresponsible borrowers created this mess.” “Credit debt and unemployment rates keep increasing, with a weak economy this is only an immediate incentive destined to become another artificial solution," said another, while a vast number of respondents said that a moratorium would only slow down any recovery and drive up costs. A similar percentage of industry insiders said that state-level foreclosure moratoriums were an equally bad idea, with 70 percent suggesting that states looking to lengthen or halt the foreclosure process would end up merely delaying the inevitable. Ony 5.5 percent of those surveyed were strongly in favor of state legislation to halt foreclosures. Legislative moratoriums "will exasperate loss severities, hurt investors, dry up capital allocation and ultimately hurt future borrowers ... a bad plan," surmised one respondent. “A moratorium will only temporarily provide relief for the mortgagee. If the fundamentals are incorrect, the mortgage will not become current," said another. The study's informal results are a telling look at what those that work in the market really think about the growing push to halt foreclosures. And, given that many of the respondents are those that work with troubled borrowers, their true opinions here should be something to keep in mind. Calif. governor Arnold Schwarzenegger has proposed a 90-day statewide moratorium on foreclosures, and Florida's governor said this week he is encouraging lenders in the state to adopt a 45-day moratorium to find workout options for troubled borrowers. Underscoring why survey respondents are so dour on moratoriums, it's worth considering the case of Massachusetts: initial foreclosure filings in the state soared 465 percent between August to September after being much lower than normal in June, July and August. That temporary lull happened after a new law took effect in May requiring lenders to give homeowners a 90-day right to cure notice before initiating foreclosure. Economists at the Federal Reserve Bank of St. Louis have warned against the use of foreclosure moratoriums in a recent paper, as well. Governments cause both immediate and long-term effects when they rewrite the terms of contracts between private parties, economist David Wheelock argued in a paper published in early November. “Although the economic and societal benefits of lower foreclosure rates are difficult to measure,” he said, “research shows that the foreclosure moratoria of the Great Depression imposed costs on future borrowers.” If the survey is any indication, they also impose additional costs on critical sources of mortgage banking liquidity, as well. Write to Paul Jackson at paul.jackson@housingwire.com. Editor's note: The Jan/Feb issue of HousingWire Magazine will take an in-depth look at foreclosure moratoriums. To subscribe, click here.

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