October 28 2010
Foreclosures Are a Necessary Adjustment
From the Washington Post:
A majority of Americans now say they are worried about making their mortgage or rent payments, underscoring the extent of economic anxiety in the country heading into midterm elections. Worries are the most intense among those with lower incomes and African Americans.
A new Washington Post poll shows that [...] 53 percent said they are "very concerned" or "somewhat concerned" about having the money to make their monthly payment. Against this backdrop, just over half of Americans say the Obama administration should impose a period of time during which banks cannot foreclose on delinquent homeowners.
I am not the least surprised that in the aftermath of one of the most severe financial crises in U.S. history, those who were encouraged to own their own homes even if they could not afford them, are now most worried that they may not be able to make their mortgage payments.
Let's recap what happened before the recession hit. The U.S. government had declared the higher proportion of prime mortgage borrowers in the U.S. housing market, compared to low and middle income subprime borrowers, an outcome of discriminatory practices. The Community Reinvestment Act (CRA) of 1977 was implemented to establish social equality in homeownership by numbers, pressuring commercial banking and savings associations to give loans to low income clients living in poor communities. Regulatory changes to the CRA in 1995 strengthened its impact by increasing homeownership among low income clients by 80%.
Increased homeownership among subprime borrowers was achieved by lowering credit requirements and slashing down payments. The economic reality of the lack of sufficient income and the higher default risk associated with subprime lenders was covered up with government sponsored enterprises that insured subprime loans by government mandate against defaults. The bubble inflated until it burst. The result: the U.S. economy was dragged into a recession under the supposedly noble premise of encouraging broader homeownership among those who in a free market society would not have been able to afford it.
We still suffer the results from these disastrous economic policies. With unemployment rates above 9.5 percent, we're currently seeing a surge in foreclosures as many people can no longer afford their mortgage payments. On the bright side, we're also seeing a surge in home sales this September, as buyers are taking advantage of lower prices and increased foreclosure rates.
I sympathize with those who are worried that they might lose their home due to foreclosure. However, foreclosures are the market's painful response to the disastrous economic policy distortions of the recent past. A freeze on foreclosures would interfere with this necessary adjustment and would only delay full economic recovery.