Sloppy foreclosure processing may prolong housing crisis

Nicolas Retsinas, housing economist at Harvard University

TEXT OF INTERVIEW

Kai Ryssdal: White House Press Secretary Robert Gibbs said today his boss is not going to call for a nationwide moratorium on housing foreclosures just yet. The basic theory they have is that that would put quite the hiccup in any recovery the housing market might be able to make. This is one of those stories that's going to be with us for a while, hopefully not as long as the financial crisis, but for a while anyway.

So to get some context we've called Nicolas Retsinas. He teaches housing finance and real estate at the Harvard Business School. Nic, it's good to have you with us.

Nic Retsinas: Nice to be with you.

RYSSDAL: There is clearly a volume problem here, right? Hundreds of thousands, millions of foreclosures, stacks of documents. But it does seem that there's something more fundamental, I guess, right?

RETSINAS: There is. It's fundamental in that the servicers who are trying to process these foreclosures have just been sloppy. It's ironic that liar loans got us into this problem, and now sloppy servicing seems to prolong the problem.

RYSSDAL: Why then is the Obama Administration against a moratorium on foreclosures? Wouldn't it seem to make sense just to put a pause on everything and figure it all out first?

RETSINAS: Well a number of lenders, investors and servicers have effectively done that. They're saying, "Hey, wait a minute, let's just make sure we have the paperwork in place before we proceed." So stopping all foreclosures will just delay the clearing of this pipeline, and as long as we have foreclosures entering the marketplace, the longer the recovery will be.

RYSSDAL: Somebody said to me the other day, it's kind of like the pig going through the python; it's just going to take a while.

RETSINAS: And at some point it's going to get through. And in the marketplace now, it's not unusual to have a third of all sales be foreclosure sales. As long as that's taking place, that's going to dampen prices, that's going to make people sit on the sidelines. So we've got to get this through, and this isn't helping.

RYSSDAL: How badly could it spread? We've had the financial crisis and that spread into the broader economy; could this then spread even more?

RETSINAS: I don't think, so because in a sense, this is clearing out the problems that led to that implosion and led to the broader crisis. I think, sadly, the more likely scenario is just a prolongment of this misery and the housing market in the clearing that needs to take place.

RYSSDAL: So let's say the president calls you tomorrow and says, "Nic, listen, I need your sage counsel -- what are the three or four things I can do to make this better?"

RETSINAS: The bigger thing, and there's a limit to what government can do, is get people back to work. Because in many ways, the problem with the housing market isn't a housing problem anymore. It's an income problem. It's people who either lost their jobs, have fewer hours or are afraid of losing their jobs. So getting people back to work is really the first, second and third thing that would try to bring some semblance of normalcy to the housing market. Moving forward with the regulations under the Consumer Finance Protection Bureau makes a lot of sense. This is a reminder of why those kinds of rules are necessary.

RYSSDAL: Given that we have become aware of how badly the mortgage-granting process was messed up in the past five to 10 years, should we be at all surprised that on the flip side of this coin that the resolution of foreclosures is messed up as well?

RETSINAS: Not at all, it was sloppy paperwork that was part -- not all -- but part of the problem that got us into this. The fact that this sloppy paperwork at the other end is a reminder of how ill-prepared the industry was, and we as regulators were to take on this problem.

RYSSDAL: Is it at all possible that because we dealt with the financial crisis, we have some grasp of how to deal with what is now a foreclosure and mortgage crisis?

RETSINAS: I'm not sure that we do, because the problem keeps changing. There were some opportunities early on in the crisis where the government could have had a more dramatic intervention; for example, bankruptcy reform, which I think could have forced some lenders and investors to the table. But that opportunity has passed. Now the problem is less of a housing problem and more of a problem of the broader economy.

RYSSDAL: Nic Retsinas, he teaches real estate at the Harvard Business School. Nic, thanks a lot.

RETSINAS: Nice to be with you.

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