A foreclosure moratorium is one of those suggestions
that sounds like a good idea. And, for borrowers currently in foreclosure or seriously in default on their loans, a moratorium would provide a temporary reprieve.
Unfortunately, for the overwhelming majority of those borrowers, a moratorium would do nothing to change the ultimate outcome of the foreclosure process, it would simply be delaying the inevitable.
On the other hand, a foreclosure moratorium would have disastrous implications for the housing market, and quite possibly for the overall economy. Foreclosure actions are already at artificially low levels due to massive delays caused by paperwork problems and ongoing settlement negotiations between the major lenders and government officials.
These delays will push out the housing market recovery by at least another 12 months, as foreclosures that should have taken place gradually make their way into the pipeline, continuing to put downward pricing pressure on the market.
A moratorium would exacerbate this situation, and essentially push out the recovery even further, putting even more pressure on an already-weak U.S. economy.
A moratorium would also very likely put a stop to all - or at least most - residential lending for two reasons.
First, a foreclosure moratorium would accelerate risk for lenders, who offer low interest rates on mortgages because of the collateral put up against the loan, but would now be unable to recoup their losses.
Second, the moratorium, by pushing out the housing market recovery, would probably drive home prices lower, meaning that banks would be writing loans against depreciating assets. In an environment where the assets are worth less and less and the banks can't hedge against potential losses by being able to foreclose, who is going to write a home loan?
Finally, don't discount the disruption that could potentially be caused by thousands of borrowers deciding to "take advantage" of a foreclosure moratorium by opting to simply stop making their loan payments. With about 25% of all mortgages being underwater, this is more than just an idle threat; it's a very real possibility.
Rick Sharga is the senior vice president for RealtyTrac, a foreclosure data provider and online marketplace.