Opinion: Big Risks From a Foreclosure Halt

(Oct. 13) -- We've recently seen a lot of reports about flaws in the foreclosure process, including lenders certifying that they're familiar with all pertinent aspects of a given case when they're not. This is unacceptable, and those responsible for such false certifications should be held legally accountable.

But the response we've seen to these revelations from many large lenders -- placing a moratorium on foreclosures -- is a cure much worse for the economy than the disease.

While these actions are certainly a well-intended effort to "protect" homeowners from the consequences of someone's wrongful action, they will do great harm to all concerned. At a time of stubbornly high unemployment, this is the last thing our economy needs.

First, it's important to understand that there are very few, if any, foreclosures where there is any dispute about whether the borrowers defaulted on loans. And the comments of lawmakers such as Sen. Chris Dodd that "American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud" are totally unfounded.

Similarly, the suggestion of a Florida congresswoman that such moratoriums should be used to facilitate discussions with lenders about restructuring the terms of mortgages in order to keep people in their homes is illogical, since the paperwork issue has nothing to do with inability to pay.

Homes are being lost because of nonpayment, not errors in the foreclosure process. Even the White House agrees that there is no reason to hold up valid foreclosures and good reason not to, although President Barack Obama is refusing to sign a bill that would expedite undisputed foreclosures on a technical level. As a result, these moratoriums have many adverse consequences for the economy. Among them:

• Home prices and economic recovery are likely to be suppressed by the protracted overhang of pending foreclosures to a greater degree than if the market would be allowed to clear; noted economists Karl Case and Mark Zandi concur in this assessment.

• Getting a loan could be harder, as lenders boost underwriting standards and interest rates if they believe there will be new obstacles to collection when it's needed. This would come at a time when we need considerably more lending.

• At least temporarily, lender -- often bank -- capital and lending capacity would be impaired as a result of inability to generate any proceeds against the outstanding balance.

• State and local governments lose the tax revenue which would be realized if these properties were in the hands of persons who could afford them.

• And in end, the foreclosures will happen anyway once the paperwork issues are sorted out, so the borrowers involved will likely gain little.

There's another problem. However, what we see with these moratoriums could breed skepticism about our economic prospects on the part of honest lenders and borrowers. Economists universally agree that a viable legal system, which enforces contracts in a predictable manner, is essential for prosperity. Undermining that will only harm the economy further.

While I won't defend dishonesty under any circumstances, it's worth noting that these falsehoods are an inevitable result of a legal process that cannot possibly keep up with foreclosures at today's volume. It's just not possible for any one individual to certify that he is personally familiar with the thousands of files at issue. The sorts of affidavits required of lenders make some sense under "normal" circumstances, but not today, especially in the multitude of cases where there is no dispute.

But instead of a moratorium, what we need is legislation, probably federal, that is suited for a high-volume environment and does away with archaic requirements for a person to review each file, where there is no dispute about payment

In the meantime, we need lenders and judges to use common sense wherever possible. And we need everyone to realize that there's far more at stake than a relatively few troublesome foreclosures.