Wednesday, November 17, 2010

More Foreclosure Problems on the Horizon

The Congressional Oversight Panel released new findings yesterday that the mess we are facing with foreclosures may have more far reaching implications for the economy than we had initially believed.  While the Treasury Department asserts that the issues with foreclosure filings do not pose a systemic threat to the overall financial system, the COP believes that such a finding is premature.  Their report states, "Clear and uncontested property rights are the foundation of the housing market.  If these rights fall into question, that foundation could collapse."

The COP's main concerns appear to be:  1. Whether mortgage servicers can actually prove that they own the loans they are servicing, 2. The broader implications to the economy if they cannot.  For instance, what happens to the value of mortgage-backed securities if on a widespread level the securities are not backed by the collateral that the servicers are purporting to own.  The COP finds that if the servicers do not actually own the loans, the loan modifications they have agreed to may be invalid.  Additionally, foreclosures they have initiated may be nullified.

To prepare for the massive crash that the COP fears may occur, they are encouraging the Treasury Department and the Federal Reserve to order new stress tests for the banks to make sure that they can withstand the losses they will incur if the problem does become "systemic."

In addition, the Senate held hearings yesterday on mortgage servicing and foreclosure practices, and tomorrow the House is holding a hearing on "robo signing" and whether ownership of loans that were being sold was properly transferred during the real estate boom.  Recommendations being floated right now include forcing banks to sell off their servicing divisions to help eliminate conflicts of interest.

It seems to me that the COP and the Congressmen and Senators are overlooking a couple of very important points.  1.  The practice of using services such as MERS to transfer ownership of deeds of trust from one servicer to another without re-recording was and is an accepted industry practice.  To now find that the servicing transfers are improper is absurd when the practice was known to regulators at the time that it was taking place.  2.  We have Americans living in homes they have not paid a penny on for over 400 days.  To continue to stall and delay the foreclosures of these properties is not good for the communities, and it is also not good for the individuals in question who need to move out of houses they cannot afford and get into housing they can afford. 

The other issue here is the proposal of another stress test.  When the Treasury conducted the first round of stress tests, they raised reserve requirements for banks so high that many smaller banks could not survive and ended up in conservatorship.  By now doing another round of stress tests and possibly raising the bar again, the FDIC may end up with conservatorship of still more banks.  But does this really serve the public good, or does it just serve to further consolidate the banking system into a few giants?  Free market principles say that competition is good, but competition cannot exist, much less thrive, when the government constantly changes the rules to favor bigger banks over smaller ones.

Instead of taking preemptive action for a catastrophe that many do not believe will occur, the government needs to allow the banking system to work through the foreclosures so that those houses can go on the market and be resold.  By continuing to find ways to stall this process and put additional burdens on the banks, the COP may well create the crisis they claim they want to avert.

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