October 30, 2010
Another View on Foreclosure Moratoria
I enjoyed Tanya's insightful Huffington Post op-ed on foreclosure moratoria. Her concerns about the effect of a foreclosure moratorium on our confidence in private contracts is well-taken. But, for reasons explained below, I have to very respectfully disagree with her conclusions.
History is always a great teacher. As I've argued elsewhere, that's especially true when it comes to the mortgage crisis. Before the Obama administration concludes that a foreclosure moratorium is a poor policy choice because its potential effects on the mortgage loan market, it should look at the actual effects on the mortage loan market of previous foreclosure moratoria.
As David C. Wheelock explains here and here, during the foreclosure crisis of the Great Depression, 33 states enacted some form of foreclosure moratoria, often limited to those borrowers most likely to be able to repay their loans with just a little modification and/or time. Wheelock clearly supports Tanya's contention that interfering with private contracts did raise borrowing costs for later borrowers. But, although the moratoria did not come without some cost to future borrowers, their long-term negative impact seems to have been fairly negligble. Meanwhile, the moratoria had a dramatic impact on lowering the numbers of foreclosures, and not just during the moratoria periods. In many cases, moratoria gave the federal government, lenders and borrowers some breathing space to re-structure loans so that foreclosures were avoided altogether.
As Tanya discusses in her op-ed, in many cases lenders are behaving irrationally, foreclosing on loans with no prospect of recovering their losses through sales in the current market. Simultaneously, families are rendered homeless, worsening the general economic crisis even without consideration of the human costs, and neighborhoods are devastated, lowering property values for those who aren't deliquent -- but increasing the chances they will become delinquent, since lower property values can take homeowners underwater, making refinancing adjustable rate loans impossible at the end of their term.
And all of that is without even considering the very real possibility that lenders are foreclosing on loans that they have no legal right to foreclose upon, which we know is happening in the rush to foreclose.
Stopping irrational -- and sometimes illegal -- behavior, to the ultimate benefit of all parties, seems to me generally a very good idea. That's all a well-designed foreclosure moratorium does. We know that, because we've done it before.
Mark A. Edwards
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Thanks very much for your post and for the references to David Wheelock's two papers. I want to study them and then rejoin this conversation. I think that there may be many lessons for us in the government's response to the Great Depression.
Posted by: Tanya Marsh | Nov 2, 2010 12:45:10 PM
You're welcome Tanya. I thought your op-ed was excellent, and you'll see that Wheelock (who seems to be a prolific author of excellent articles for the Federal Reserve) agrees with your main point: moratoria raise the costs of borrowing for future borrowers. My addition to the discussion is just that the cost may be worth the benefit, as it may have been with at least with regard to carefully crafted moratoria during the Great Depression.
Posted by: Mark A. Edwards | Nov 4, 2010 2:27:15 PM