The Consumer Financial Protection Bureau (CFPB) has set new rules to block what it sees as abuses of the foreclosure process. The Washington Post reports that the action is to:
… prevent such problems by requiring mortgage servicers to maintain accurate records, offer ongoing access to staff and provide options for delinquent homeowners to avoid foreclosure, among other things.
The mortgage companies say that adhering to the new rules will be costly. The government says that the abuses have to stop, which is fair enough. The entire ongoing battle begs the question of whether the federal government’s intervention across the broader mortgage industry, meant to keep more people in their homes, helps or hurts the process of putting the housing collapse into the past.
One theory is that anything legal that quickens the process of foreclosures will allow home prices to stabilize after a brief and perhaps sharp drop in some regions. Houses that people cannot afford, but many continue to hold because of new rules, often fall into disrepair. And many mortgages continue to be underwater, even though improving home prices have eroded that problem to some extent. In addition, people who own homes that are worth less than their mortgages continue to default, even if they can afford their payments. Add these “strategic defaulters” to people who will never be able to pay back banks, and the plague of foreclosure sales will continue for years.
Foreclosed homes affect the prices of the houses around them as these bank-owned properties enter inventory, usually at relatively low prices. This drag on prices undermines home equity in neighborhoods where banks try to sell foreclosed homes. This creates a vicious cycle as more mortgages in the markets are pushed underwater because their value is pressured by bank-owned inventory.
It may be better to lance the boil and encourage banks to foreclose on properties in cases where they have legal rights to do so. Government measures have made financial firms skittish about how they should handle the fate of homes that they know the owners cannot afford. The least risky path in the face of government pressure is to allow homeowners who eventually will leave their homes in a state of limbo.
The housing market will take longer to heal if prices constantly are pressured by inventory that almost has to be sold cheaply because banks do not want to own houses for long periods. These banks have no means to maintain the properties, which eventually makes them less attractive.
The glut of homes that will be lost to their owners needs to be cleared as soon as possible, and the government needs to help in the process.