Geithner’s bizarre foreclosure logic

By Felix Salmon
October 13, 2010
transcript of Tim Geithner's appearance on Charlie Rose last night:

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Politico has the transcript of Tim Geithner’s appearance on Charlie Rose last night:

I think it’s important to recognize, Charlie, that if you — a national moratorium would be very damaging to exactly the kind of people we’re trying to protect, because the consequence of that would be in neighborhoods that have been most affected by the foreclosure crisis, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living longer with houses unoccupied, with more pressure on their house price with the people still in their houses. That would be very damaging.

I don’t follow this logic at all. Geithner is absolutely right that empty houses are a Bad Thing. But he seems to think that a foreclosure moratorium would cause empty houses. Isn’t it foreclosures which cause empty houses?

I feel I’m missing something obvious here — but as I understand it, when a bank forecloses on a house and sells that house, it evicts the previous owners as part of that process. One the old owners are evicted, the house is empty — until the bank manages to sell it. If the foreclosure doesn’t happen, the eviction doesn’t happen, and the house isn’t empty.

Is Geithner implying that banks will continue to evict homeowners even without foreclosing on those properties? Is that even possible?

Update: Treasury responds, via email.

First, at least 40 % of all homes in foreclosure are vacant.  Delaying conveyance of title and resale has devastating impacts on neighborhood values
and increases demand for municipal services.

Also, a blanket moratorium equally impacts the banks that are acting in accordance with the law increasing costs for servicers and investors.
This threatens the safety and soundness of smaller community banks that are not part of the document problem and ultimately limits market
liquidity preventing low and moderate income borrowers from refinancing or buying a house as investors are ever more hesitant to lend to all
but the most pristine credit borrowers.

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Comments
16 comments so far

In my neighborhood, we had several homes empty out long before the foreclosures were finalized. The homes then sat empty until new buyers moved in; I don’t know if this is a typical experience, or if banks often have to kick the previous occupants out on the day of the auction.

Posted by MitchW | Report as abusive

Geithner is confusing two issues, but still correct. The underlying problem that led to halting foreclosures is also leading to concerns about clarity of title for bank REO property (post-foreclosure houses owned by the banks).

If would-be buyers and industry participants are worried about clarity of title (as a result of alleged improper actions in foreclosures), then the banks won’t be able to quickly sell REO property, and that property probably IS lying vacant.

A foreclosure moratorium signals problems with foreclosures, which jams up the post-foreclosure sales process.

As Yves Smith has shown, just wait until the public realizes that foreclosure problems are just one symptom of the foundational, and perhaps unfixable, problems in the entire RMBS securitization process.

Posted by SteveHamlin | Report as abusive

lots of homes are empty before foreclosures happen. I think JPM’s 8k today said that 35-40% of their foreclosures are vacant at the time of foreclosure.

Posted by KidDynamite | Report as abusive

I don’t exactly follow Geithner here either. But (and I am venturing an explanation here) if the bank cannot foreclose a mortgaged property, maybe they don’t want to give the loan to begin with, and all those unsold houses will remain unsold.

Yes, I agree it is a stretch and the explanation doesn’t make too much of a sense either, but this is the best I can come up with trying to give any sort of context to what Geithner said.

Posted by lgg | Report as abusive

Kid, even if your figures are correct, isn’t the problem pretty obvious? If 33-40% are vacant, then roughly 60-65% are not vacant (ignoring squatters), and continuing w/ foreclosures causes more empty homes.

The issue w/REO homes not moving back into the market b/c of doubts about the title seems a more valid concern, but one not directly tied to the foreclosure moratorium, so much as to past errors in the way the foreclosures were conducted. So it’s a little hard to see why continuing the foreclosures before the flaws in the foreclosure process have been straightened out is going to make that problem any easier to fix.

Posted by retr2327 | Report as abusive

I think Igg may be onto the answer — perhaps if banks can’t foreclose on existing properties, they can’t get rid of the bad debt on their books and are in turn hindered from making more loans, which would in turn help to move already foreclosed properties. Sounds attenuated, I know, but seems plausible.

Posted by Jboy609 | Report as abusive

Let’s follow the logic:

(1) There are houses that have been foreclosed and are on the market.

(2) There are other houses where the owner is behind on payments, and will not be the owner at some point in the future–assuming the real owner can claim possession of (clear title to) the house.

(2b) Those houses will go on “the market” after they are foreclosed, because the bank doesn’t want to own them either.

(2c) Some section of those houses in (2b) are already vacant. All of the houses in (2a) are vacant. If the foreclosures proceed, all of the hosues in (2b) will be vacant. If they do not, there is a chance that some of the (2a) houses will be sold to people wanting to own them, and therefore become occupied.

Having once tried to buy an in-foreclosure-process house where my realtor was on both sides of the transaction–and having been unsuccessful then, despite title not being an issue–I believe I can safely say that Tim Geithner is, as usual, lying. (That he is doing so in such a way that people try to give him the benefit of the doubt is why, pace Brad DeLong, he generally wins political arguments.)

Posted by klhoughton | Report as abusive

What klhoughton said. The first paragraph of the treasury response is not actually a valid justification.

Regarding the second paragraph: was “a blanket moratorium” on all mortgage foreclosures, regardless of mortgage holder, actually proposed? And if so, why? Isn’t the conveyance problem with securitizations? How would a moratorium on foreclosures associated with RMBS threaten the safety and soundness of “smaller community banks”? And is it “pristine borrowers” that are in short supply, or pristine lenders?

Posted by Greycap | Report as abusive

The interview itself has such a different flavor than what I get from reading this article and its comments.

@Greycap,

Charlie Rose was fishing for Geithner to support a blanket moratorium. Geithner responded by criticizing the large banks, supporting moratoria at banks that had problems, but not supporting a blanket moratorium.

@Felix,

I think this is Treasury’s point:

Assume a six month moratorium. The houses that have already been abandoned during foreclosure will remain unoccupied six months longer than usual, because the bank can’t sell them until the moratorium is lifted.

Now, you might respond that the occupancy rate will go up on net because the people who stayed in their houses during foreclosure (and everyone who would have been foreclosed on) will stay in their houses. And over the short term, maybe it will. But that’s not correct over the long term, because in six months, they’ll go into foreclosure, and will presumably have average length unoccupancy periods thereafter. Their unoccupancy is just being delayed.

I think that’s Treasury’s model. Now, there are a couple assumptions you can pick at here. The most notable is that it assumes the paperwork problems, while pervasive, can be overcome to the satisfaction of judges that will be very skeptical.

Posted by AnonymousChef | Report as abusive

We don’t need the government or anybody else to institute a moratorium on foreclosures. Let’s just fine banks $500,000 for every house they foreclose that isn’t done properly (and $5 million for foreclosing on houses they don’t own). That will achieve the desired goal, which is that these banks do their job right. It’s a lot to ask, I know, but that’s why they get the big bucks.

Posted by OnTheTimes | Report as abusive

Who does Geither work for? The Treasury. And who do they work for? The banks. What does anyone expect the guy to say?

Posted by Jakesnake | Report as abusive

TurboTax Timmy could also be know as Mr. “Extend and Pretend.”

He has not made a single decision at the NY Fed or Treasury which was not wholly in favor of letting the banks off the hook for incompetent and egregious behavior. In fact, the rising compensation at the banks over the past few years has shown that he has been enriching them at a time when a number of them should have been “resolved” less favorably.

Posted by ErnieD | Report as abusive

Great discussion. I am going with Steve on the explanation and klhoughton on the why. The media is being manipulated and this is the precursor statement to justify ‘tweaks’ in law to get the ‘paperwork problem’ (that sends individuals to jail but banks are immune to the law of late) out of the way being it will more like a year, not a month, before this is resolved legally.

The notes are evidence of debt, so if the public can be convinced the homeowners are the culprit and those still in their jomes are all deadbeats (sure some are but not all)

The systemic risk that is being down played in most media, is the possible downfall of banks if they have to eat the loans and we all know the public is not looking too kindly on them in the USA. So golly gee, whose side is he taking anyway?

It would be fairly safe to say the legalities of hashing this out would cause more economic problems, but changing the law in the banks favour to ‘fix’ this?

~~SHUDDERS ~~

Posted by hsvkitty | Report as abusive

The actual problem with foreclosures to date is that Title Insurance companies cannot guarantee a legitimate chain of title because of the robo signing.
If banks were willing to sell foreclosed properties, Title Companies are not willing to insure a clear title without the opportunity to see the chain of title, which the banks cannot provide.
That is what is driving the foreclosure problem.

Posted by VinnieTheSnake | Report as abusive

So, maybe a moratorium on the foreclosure of occupied buildings?

Posted by Zdneal | Report as abusive

Geithner or as I affectionately call him, Capt Transparency is at it again does anyone think this guy is working for the American Home Owner at risk. He is gonna close the conference room door and cook the books into a nice big cake for the American homeowner to eat instead of bread after they are evicted. Felix, Thanks for keeping an eye on the Hypocrisy that currently rules The fact that the issues are so wide spread and specifically documented may not be enough. Hopefully individual Americans will question the authority and make these alleged Bankers pay… http://diligencegroupllc.net/

Posted by ahouse1 | Report as abusive
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