The root of the mortgage crisis is the fact that millions of Americans bought homes they could not afford.
To put the crisis behind us, we have to get those people into homes they can afford, either to buy or to rent. In many cases, this means we must allow their former homes to go to those with bigger budgets. The sooner we accept this inescapable fact, the sooner our economy will escape the gravitational pull of housing’s black hole.
But the Obama administration and others have done all they can to stave off foreclosures, slowing the necessary game of homeowner musical chairs. Efforts like the 2009 Home Affordable Modification Program have focused on keeping homeowners with underwater mortgages in their present homes, rather than encouraging a cycle of buying and selling that could bring housing prices to a sustainable and healthy level. These efforts have all been more or less unmitigated failures.
Now desperate homeowners, their lawyers, and politicians — who are eager to please — have found yet another way to stop the wheels of change from turning.
While processing an overwhelming number of foreclosures in the past few years, many major lenders cut corners on paperwork. Bank employees have admitted signing documents they never read. Other documents that should have been signed in the presence of a notary public apparently were not. In some cases, gaps in the paper trail left it unclear who actually owned a particular loan at a given time, meaning banks may have foreclosed on houses without actually having the standing to do so.
These lapses are troubling, and in many ways inexcusable, but in most cases there is no dispute over whether borrowers have been making payments. Sooner or later, most of those homeowners are going to have to part with their property.
At the moment, it looks like this will be later rather than sooner. All 50 states have launched investigations into the mortgage snafus. The government-sponsored agencies Fannie Mae and Freddie Mac have been dragged into the mess via the securities they manufactured out of shoddily documented (and even more shoddily underwritten) loans. Fearing lawsuits from regulators and displaced homeowners, key lenders have agreed to put foreclosures on hold until the paperwork issues can be sorted out.
JPMorgan Chase & Co., Ally Financial's GMAC Mortgage unit and PNC Financial have implemented freezes only in some states, while Bank of America Corp. has halted foreclosures nationwide.
This freeze in foreclosures is casting a chill over the entire housing market. Some would-be buyers have even had houses snatched out from under them after real estate agents were instructed not to sell properties that were previously foreclosed. One Florida man profiled in The New York Times was trying to move from a house he could no longer afford to a smaller one he could afford. This is exactly what needs to happen to get the housing market back on track. But the house he was planning to buy was a foreclosed property, and, before he could close, it was pulled off the market.
Analysts do not believe the effects of the freeze will be long-lasting. But even if the impact is only short-term, it still pushes back the date when we can finally say that the housing market has returned to normal. The uproar has also created a heightened sense of uncertainty, prompting potential homebuyers to rethink entering the fray.
Sooner or later, to get the housing crisis behind us, we are going to have to face up to the fact that not everyone who wants to stay put will be able to do so. Delaying the inevitable, by passing misguided legislation or by overreacting to banks’ problematic documentation, does nothing to help us move forward.
The foreclosure freeze may give some homeowners a bit of extra time in their soon-to-be-former domiciles, but in the end, we all lose as we put off a reckoning that only gets worse for the delay.