Foreclosure Moratoriums may do More Harm than Good

One of the most popular foreclosure prevention programs is foreclosure moratorium.  This process holds up the foreclosure process to give time to homeowners to get back on their feet. But some critics say that these intentional delays may create even more problems than they actually solve.

In the month of October, about 85,000 homes succumbed to foreclosure, and nearly a million homes were lost within the past year. Meanwhile, many prominent and influential people, including the governor of California and the recently elected president, have called for foreclosure moratoriums. By freezing foreclosures rather than letting them go forward, supporters of the idea say that it can give homeowners, mortgage lenders, and government officials time to implement foreclosure prevention plans. That could potentially save many people from losing their homes.  Without a foreclosure moratorium, those houses will soon go on the auction block.

Opposing foreclosure moratorium

Those who are against the idea say that a foreclosure freeze will only hurt lenders and postpone the inevitable. They call foreclosure prevention of this manner a bad idea that can only make the current foreclosure crisis more painful, not less. The big reason is that those who service mortgages usually have a contractual obligation to investors to continue to pay foreclosure costs, taxes, insurance, and other property expenses-even after the homeowner stops making monthly payments. The service company gets reimbursed later, after the foreclosure is completed. But if there's a foreclosure moratorium, the mortgage service company's money may be put into legal limbo for an indefinite period of time. With a tight credit market, many of these businesses can't keep carrying their costs while waiting to be repaid.  It's pushing some to the verge of insolvency.

Foreclosure lessons from Great Depression

Even the Federal Reserve Bank of St. Louis has come out against a moratorium on mortgage foreclosures, citing evidence from the Great Depression. More than 25 American states enforced mandatory foreclosure moratoriums during this greatest economic slowdown in U.S. history.  That forced banks to reduce the number of loans that they made because they were unable to unload foreclosed properties from their balance sheets. Today's mortgage service companies agree that they're already feeling the financial pressure from laws that require them to contact borrowers before they file legal foreclosure notices, because any delay in the process costs them too much money.

But homeowners and their Congressional representatives are unlikely to accept the argument that notifying someone before you begin foreclosure proceedings is too much to ask.  On the contrary, most housing advocacy groups and government officials fault mortgage companies for not doing enough to contact distressed borrowers or families who are threatened with the loss of their homes.

Despite the potential problems that some see with these foreclosure moratoriums, many lenders are voluntarily halting foreclosures on the houses in their portfolios. JP Morgan Chase, for example, is instead trying to work with borrowers to do loan modifications that will allow them to stay in their homes while still paying off their debt.