Sifma’s unhelpful take on the foreclosure mess
Sifma CEO Tim Ryan released this statement today:
“It would be catastrophic to impose a system wide moratorium on all foreclosures and such actions could do damage to the housing market and the economy. It must be recognized that the mortgage market, investors and the health of the economy are all inter-related. Investors in the housing market—including American workers with pension funds, 401k plans, and mutual funds—would unjustly suffer losses in their savings from these actions. Increased uncertainty in the securitization market would further constrain consumer credit and spending, dampening our already unhealthy economic situation. If mistakes have been made in relation to foreclosure processing, SIFMA firmly believes such mistakes should be corrected. It is imperative, however, that care be taken in addressing these issues to ensure that no unnecessary damage is done to an already weak housing market and, in turn, that there is no further negative impact on the economy.”
It’s worth going through this slowly to see just how bizarre it is.
Firstly, it’s Sifma’s own members — with Bank of America taking the lead — who are imposing “a system wide moratorium on all foreclosures”. No one’s suggesting that the government could or should do such a thing: a foreclosure is, after all, a legal action brought by one private entity against another. It makes sense, if you’re going to sue somebody, that you make sure in advance that you have the your legal ducks in a row. Right now it’s abundantly clear that most loan servicers don’t have their legal ducks in a row, so it makes sense for them to stop foreclosing on homeowners, at least for the time being. (In Bank of America’s case, it has even tried to foreclose on houses which don’t have a mortgage at all.)
Secondly, it’s not foreclosure moratoriums which damage the housing market, it’s badly-documented mortgages. A healthy market is one in which title and ownership are clear and legally watertight; in which assets change hands at market-clearing prices; and in which value and market price are generally understood to be one and the same thing. Using these criteria, it’s pretty obvious that the housing market is not healthy now, and that the longer this foreclosure crisis drags on, the less healthy it’s going to be.
Crucially, you can’t judge the health of the market by house prices alone, especially when home sales are plunging and foreclosure sales often take place a good 35% below market values. And what goes for the housing market also goes, mutatis mutandis, for the mortgage market. It’s entirely possible that secondary-market RMBS prices will fall if housing prices drop. But in the medium to long term, what’s really necessary is for investors in mortgage-backed securities to have faith that they really own what they think they own. And the only way to do that is to bite the bullet and fix the mortgage mess.
In any case, it’s far from clear that a foreclosure moratorium would hurt house prices — or even RMBS prices — at all; indeed, it’s pretty hard to see exactly what Ryan and Sifma are worried about. They say that they firmly believe that the mistakes made in relation to foreclosure processing should be corrected, but they don’t bother to tell us how that’s meant to happen.
It would be great if Sifma were to take the lead on this issue, and come up with constructive solutions to a serious problem. Instead, they’re just delivering an inchoate and unhelpful blast of opposition. Sad.