The pros and cons of a foreclosure moratorium
TEXT OF INTERVIEW
Kai Ryssdal: The chairman of the Fed weighed in on the foreclosure mess today. Ben Bernanke said he and the gang at the Federal Reserve are concerned about potential irregularities — those are his words — in foreclosure practices at some of the big banks. They’re working on a report that’s going to be ready sometime next month or so.
In the meanwhile, the banks say it’s all just a paperwork glitch. Critics say it’s substantively more than that. So we’re going to start this Monday by dissecting those arguments a little bit. Here to help us do that we’ve called Richard Green. He teaches real estate at the University of Southern California. Mike Konczal is a fellow at the Roosevelt Institute in New York City.
Good to have you both with us.
Richard Green: Pleasure to be here.
Mike Konczal: Thanks for having us.
Ryssdal: Richard Green, the first question, I suppose, goes to you: Why not just sit back and wait and let Bank of America and JPMorgan just really figure out the paperwork and have a moratorium.
Green: I think a couple of reasons: First of all, a moratorium will extend the crisis further, because it will delay resolution of the problems that we have in the market. And we do ultimately have to resolve this problem one way or the other, either through foreclosure, through loan modification, there needs to be a sense of urgency about this. And second, I think it sets a bad precedent. And if lenders in the future don’t think they’re going to be able to take houses back from people who haven’t paid for them, they’re going to be reluctant to come back to the market.
Ryssdal: What if though, Mike Konczal, we just say, “Wait a second. Let’s sit back and look at the documents and figure out what’s going on?”
Konczal: Well, exactly, and what do we do for people who are purchasing homes, people who are being foreclosed on right now? So, a mortgage has two parts to it: It has the lien and it has the note. The note is the actual debt, it’s the terms of your debt, it’s what late fees you pay if you don’t have pay it. And the lien just says that they can take your house if you don’t pay the note. But ultimately, if you have a problem with your mortgage, you need to consult the note.
Ryssdal: Right, those notes are the things that are basically lost, that we don’t know where they are.
Konczal: People are checking right now, and they can’t find them, which is why we need a moratorium to figure out where these things are and what we can do about it.
Richard Green, does it matter that we don’t know where the notes are? I mean, isn’t it all a paperwork drill?
Green: Of course it matters. And I don’t want to, in any way, be seen as defending the practices of many lenders and servicers. But the problem is that a moratorium is such a blunt instrument and it says everybody — even if you’ve done your job right — is going to be subject to delaying their ability to foreclose on houses. And I think that creates a whole other set of problems.
Konczal: Well, I do want to push against the idea that liquidating the home owners is what’s best for our economy. A lot of people seem to have the opinion that we just have so many foreclosures we have to get through, and once we get through them, we’re done. This is very dangerous. What we know is that a foreclosure’s a lose-lose-lose scenario. It’s bad for the home owner, it’s bad for the investors — that’s why all these investors are suing the servicers, because they end up with properties that are worth nothing — and it’s bad for communities. There’s well-documented spillover effects, it devastates local municipality budgets, there’s crime — there’s all kinds of really bad things that go with foreclosures. What we need is a system in place to allow people to renegotiate their mortgages.
Ryssdal: Well that goes to a bigger point, Richard Green, which is that the reason capitalism works is ’cause we know that when a seller sells, he or she has clear title to sell, and the buyer has clear options to purchase. Seems to me that capitalism doesn’t work if the mortgage system in this country and the documentation of these loans is ineffective.
Green: That’s absolutely correct. And that’s why this is. I mean, I agree with Mike. This is a huge problem and it is very disturbing to see the kind of sloppiness in the foreclosure process that we saw in the lending process. But that doesn’t mean we need to help out every single borrower who has taken money out from his or her house. If there is no ability to foreclose on people — I mean, this is an unpleasant reality — if you can’t take people’s houses away from them, you’re not going to have a mortgage system.
Ryssdal: So, Mike Konczal, let me ask you this though: Congress is otherwise occupied — they’ve got the election — the banks are trying to move past this as briskly as they can. What then happens if nobody’s paying attention?
Konczal: Well exactly. If we don’t do a moratorium — if we just say, “Things are in motion, let’s just let them play out” — we know what we’re going to see. This is not very good for class-action suits. People are with different claims across different states, and it’s going to be very hard to mobilize them in order to make banks accountable. The investors are going to slow down this process on their end, by suing themselves. And we’re going to suddenly have lawsuits that are floating out there and foreclosures going through even though there’s lawsuits that have them at stake. But ultimately, we saw this problem back during TARP. We saw this problem with a large history of servicer fraud through the 2000s. Ultimately, it’s the same problem over and over again — it’s that the servicers are not accountable to either investors or home owners.
Ryssdal: Richard Green at the Lusk Center for Real Estate at the University of Southern California just down the street. And Mike Konczal at the Roosevelt Institute in New York. Gentlemen, thanks.
Green and Konczal: Thank you.
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