Figuring out foreclosures
Home prices in 20 major U.S. cities turned south again in August, according to the S&P/Case-Shiller index, signaling that the troubled housing market may not have hit bottom. Although home sales have increased in recent months, there’s still a nearly 11-month supply of unsold homes. And with an estimated 6.7 million borrowers delinquent or in foreclosure, the inventory of houses for sale is likely to grow.
The most significant impediment to the housing market’s recovery, though, may be lender incompetence. The emerging details about improper shortcuts taken by lenders as they sold loans to investors and foreclosed on defaulting borrowers have prompted investigations from an array of federal and state regulators and enforcement agencies. Borrowers are also filing lawsuits alleging that their foreclosures should be halted or reversed because of banks’ procedural errors.
Not to engage in schadenfreude, but there is an element of poetic justice here. Banks pumped up the housing bubble by handing out loans like penny candy, paying little attention to such antiquated notions as the borrower’s ability to repay. Investors followed suit, snapping up mortgage-backed securities without giving much regard to the quality of the underlying loans — an exercise in self-delusion encouraged by see-no-evil ratings firms. When the bubble burst, it shocked the financial system severely enough to send the global economy into a tailspin.
There’s plenty of blame to go around for the slow recovery that ensued. For its part, Washington proved far better at putting out the fire in the credit market than in restoring it to full functionality. But lenders and mortgage servicing companies have dragged out the misery by trying to manage the flood of failing loans on the cheap, resisting calls to offer real loan modifications.
And now we see that the industry didn’t confine its slapdash practices to loan underwriting. The securitization of loans and the subsequent foreclosures on defaulting borrowers were also marked by carelessness and even fraud in some cases. Many borrowers may be defaulting because of their own bad judgment, but it’s hard to feel sorry for lenders who can’t foreclose on them because they can’t prove who actually owns the loans.
Nevertheless, the banks’ burgeoning inventory of failing mortgages is limiting how much they can lend, hindering the economy’s recovery. That’s why it’s important for lenders to step up efforts to write down borrowers’ debt when it will cut losses for both sides, and to fix the procedural problems that have stopped them from foreclosing on borrowers who are beyond help. It won’t be cheap or easy. But then, cutting corners helped get us into this mess in the first place.
