Saturday, October 16, 2010

Freeze on Reposession - Sounds Compassionate, but is Bad Business

We're all pretty much aware that home foreclosures are at an all time high and the number just keeps on growing.  You may even have followed the story of the family in Denmark, ME who refused to pay their mortgage for years, but had the foreclosure fail because of shoddy paperwork by the bank.

As that story unfolded, the world discovered that the subprime loan debacle was not the only skeleton in the closet of the embattled mortgage industry.  We have learned of falsified signatures, 'robo' signers, clerical errors, and more.  The banking world has given itself another black eye.  I've even heard stories of people who were current (and always had been) on their loans, being foreclosed on!

Now we have another mess at just the time we need some stability.  What we don't need is a knee jerk reaction that cripples the already wounded housing industry.  But what we're getting is a knee jerk reaction.  Go figure.

There is talk of a moratorium on foreclosures and some lenders have enacted voluntary freezes.  On the surface, that sounds compassionate and responsible.  In reality, it has the potential of hurting everyone who is trying to sell a house or even buy one.  Here's why I think so.

First, if I'm a title insurance company, I am much less likely to risk underwriting anything.  No title insurance, no mortgage.

Secondly, if I'm a lender, what motive do I have to loan money?  If there is no guarantee and I must bear all the risk, I have no incentive to put my money out on the table. 

If I'm a homeowner, I'm tempted to to say, "Hey, why should I pay my mortgage?  The guy down the road hasn't paid his in 2 years and nothing has happened, why am I being punished for being responsible?"

If I'm trying to sell my house, I'm stuck because even if someone wants to buy my house, the buyer's trouble in finding title insurance or a willing lender may kill the deal.

There is no excuse for the shoddy business practices that have led to this mess.  The perpetrators should be uncovered and dealt with accordingly.  But let's not damage our economy more, by over reacting.  In my opinion, the suggested moratorium is a political move rather than a financially sound one.  Deal with each case, each mortgage and each lender on an individual basis.  Grant assistance where assistance is required.  Dole out justice where justice is required.  Repossess where appropriate, and fine or close up those businesses who have done wrong.  But don't, please don't, risk us all.