How not to help homeowners

Monday, October 18, 2010

THERE WOULD NEVER be a good time to find out that vast numbers of home foreclosures have been tainted by flawed or phony documentation. Now is an especially bad moment: In September, lenders foreclosed on 102,000 houses, a record for a single month. More are in the pipeline. Of course, it's election season, which is not exactly conducive to a calm, deliberate policy response. Politicians and interest groups are demanding solutions before anyone fully understands the problem.

So far, though, the Obama administration has shown admirable political courage; it has launched an investigation but stopped short of ordering a national moratorium on foreclosures, as many have urged. Advocates of a moratorium say that it's the only way to ensure that no one loses a home improperly. Ally Financial Inc.'s GMAC Mortgage and JPMorgan Chase have voluntarily suspended foreclosures in 23 states, and Bank of America has suspended foreclosures in all 50 states. But the administration argues correctly that a federally ordered moratorium, on balance, would make matters worse.

Right now, the national home vacancy rate is about 10.9 percent -- well above the historical average of 7.7 percent, according to Deutsche Bank. Taking into account impending foreclosures, population growth and other factors, it will take until mid-2012 to work through this excess inventory, which amounts to about 4 million homes. Anything that delays this process also postpones the inevitable bottoming out and ultimate stabilization of the U.S. housing market -- and the resumption of broader economic growth. Indeed, banks have already aborted many sales because of concerns over documentation, costing would-be home buyers thousands of dollars each and leaving their families in limbo.

To be sure, the revelations of "robo-signing" and other sloppy or unlawful methods are disturbing. There are big lessons to be learned, especially about how mass securitization of poorly underwritten home loans may have swamped the states' antiquated, cumbersome property registration and foreclosure procedures. It is also true that the scandal underscores the failure of the Obama administration's efforts to prevent foreclosures.

But what matters most is whether the misconduct caused large numbers of people to lose homes they otherwise could have kept. And so far, officials have found no evidence of that. This is logical. The robo-signed affidavits at issue were part of a technical review of documents, not the actual determination of a borrower's delinquency. By the time robo-signers put pen to paper, default had been well established. An ironic consequence of diverting staff to fixing affidavits now is that it leaves fewer people to modify salvageable loans.

Anyone involved in fraud or misconduct should be held accountable. But a federally mandated halt to foreclosures could harm the very homeowners and home buyers it purports to help. The Obama team is wise to resist it.

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