Foreclosure Moratorium Over

In response to government pressure, some large mortgage companies had issued moratoriums on foreclosures while awaiting details of the administration’s housing-rescue plan. As a result of these self-imposed moratoriums, as well as legislation introduced last year in states like California that limited foreclosure activity, foreclosure sales had dropped in the second half of 2008. JP Morgan, Wells Fargo, Fannie Mae and Freddie Mac have all increased foreclosure activity in recent weeks as those moratoriums have expired. According to RealtyTrac, foreclosure-related filings increased by nearly 6% in February, up from a month earlier, and were up almost 30% year-over-year. In California, notices of trustee sales, a prelude to foreclosure, climbed by more than 80% to 33,178 in March from February, according to ForeclosureRadar.com and the Field Check Group.

JP Morgan Chase has delayed foreclosures on more than $22 billion of Chase-owned mortgages involving 80,000 homeowners. A spokesman says “We had stopped putting additional loans into the foreclosure process so we could be sure that delinquent borrowers would have every opportunity to take advantage of new initiatives that we were putting in place.” Those who are now receiving notices “own vacant properties, have not been in contact with us and/or do not qualify for the modification programs.” Citigroup and Wells Fargo also indicated that they were working on loan mods for those who qualified, but were moving forward with foreclosures on borrowers that did not qualify.

Since this whole mess began, evidence has shown up time and time again that large scale mortgage mods don’t work particularly well. Operation Hope for Homeowners has helped 700 homeowners since its October inception, instead of the advertised 400,000, and the re-default rate on mortgage modifications is pretty discouraging. According to the OCC, for mortgage mods that reduced the borrower’s monthly payments by over 10%, 20% of borrowers were in default again after nine months. If the monthly payment was reduced by less than 10%, the default rate jumped to over 40%. While the evidence points to some relief for those borrowers who received reduced monthly payments, it has not been a resounding success.

I have maintained all along that cleaning up the large inventory of foreclosures and empty houses is the quickest road to recovery. The longer we wait by imposing moratoriums, etc, the more painful the recovery process will be as housing prices decline further due to bloated inventories of empty houses. As it stands, we’ll be having large scale RTC-style auctions of properties at some point as the FDIC seizes more banks and winds up with a large inventory of properties. I’d rather have them in 2009 than 2012.