Tuesday, October 12, 2010

More Thoughts on the Mortgage Crisis

The politicians are all hot and lathered about the latest bone-headed moves by banks that submitted faulty documents as part of their foreclosure process. I watched the debate between the Democratic and Republican candidates for Michigan governor Sunday night. The Democrat beat his breast about how we needed a moratorium on all foreclosures because of the banks’ misdeeds. The Republican suggested that since the rules the banks and their employees should follow do work, we should punish the rule-breakers, not suspend the process.

In the election hot air, many politicians are willing to ignore any and all economists in order to play to the crowd—even when the solution they propose (in this case a holiday from all foreclosures) will only worsen our overall economic situation.

With an exception here and there to prove the rule, the right houses are being foreclosed by the right banks because homeowners are not meeting their mortgage obligations. Do I condone the sloppiness of those who try to circumvent the legal process? No – see my comments on the subject. Those banks should stop their foreclosure processes until they have their paperwork in order. However, anything that artificially slows down the adjustment process hurts everyone. If politicians impose a moratorium, people will not ultimately keep houses they otherwise would lose. They will still lose them; it only delays the day of reckoning.

Furthermore, until the massive supply of foreclosures is cleared out of the system, we cannot regain market equilibrium. With the huge volume of overhanging foreclosures, who can say for sure what the market price of a home is? Certainly those people being foreclosed are not willing sellers, and banks who have already written off their losses tend to sell properties at a lower price than the rest of us. Why would housing prices increase (or even stabilize) until this overburden of foreclosed houses becomes a de minimus part of the overall market? It’s like asking people to pay full price when the store is proclaiming in big letters: CLEARANCE SALE COMING SOON. Only when we return to willing buyers and willing sellers can a fair market value be determined.

Many of those who will be foreclosed have lost their jobs. As long as they “own” a house—particularly one that costs them little to maintain because they have stopped making mortgage payments and investing in upkeep—they are less likely to move to another area to take a new job. This too inhibits the recovery process because the job market has an added inefficiency.

Whenever governments artificially prop up a market it involves a transfer of wealth to the benefactors from everyone else. Sometimes the cost is worth the benefit. Not this time. The best thing we can do for the housing market is to have it function with minimal governmental interference. We humans are very adaptable, but resistant to change. Putting off the inevitable delays healing. As sick as I feel for those who are losing their homes, they aren’t going to start to heal until they move on; nor will the market heal until it transcends the foreclosure tsunami.

~ Jim

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