Random Thought du Jour on Foreclosures

A post I saw at CL&P Blog, which mentioned that Minnesota is seriously considering a moratorium on foreclosures, got me thinking.

Isn’t a simple moratorium just a postponing of the inevitable?   After all, unless something else happens, in all likelihood many of the potential “foreclosees” will be unlikely to catch up with their payments, the potential resale value of the potentially-foreclosed property dwindles due to lack of debtor incentive to maintain the property, and the lenders suffer a certain amount of balance sheet pain from having to keep bad debt on the books for that much longer.

I can empathize with the sentiment that something needs to be done to stop a flood of foreclosures.   Yes, I am a little disgruntled with the sentiment — my wife and I accepted a higher interest rate and bought less of a house than some of our peers, because we saw the potential downside of going with an ARM; therefore it’s tough accepting the apparent unfairness of folks being bailed out of their bad bets while those of us who made more responsible decisions are left to indirectly pick up the slack.  But I accept that a hard crash of the real estate market is not a good thing for the country, and I can definitely empathize with how life can suck when luck goes against you.

As part of bankruptcy reform a couple of years ago, Congress sought to make it tougher for individuals to seek bankruptcy protection, or to limit such protection, under the premise that there were too many folks abusing the system.  The pros and cons of the changes can be a subject of debate, but the fact remains — our leaders thought bankruptcy should be a measure of last resort, and therefore put a couple of extra hoops in the process, to attempt to get others to perceive it as a last choice and to be aware of potential, less extreme alternatives.

I wonder if those states and localities that are pushing for moratoria shouldn’t adopt a similar stance.

Rather than simply stop foreclosure actions for a time, perhaps legislators and regulators should be attempting to introduce new hoops, with an eye towards making sure that every other alternative has been exhausted.

For example, I could imagine lenders being obliged to seek to work out some form of alternative financing arrangements, or facilitating access to third-party counselors to provide guidance to delinquent homeowners.  

I could also imagine a rejiggering of laws or regulations to facilitate real estate transactions whereby a delinquent homeowner can sell a property to a qualified buyer, who would assume the outstanding mortgage as part of the deal.

Heck, I could also tolerate new laws/regs adopted to incent banks to flip foreclosed as quickly as possible, even if the house sells at a low price.   (A 900% property tax surcharge on foreclosed properties not reoccupied within 6 months, anybody?)  Structured properly, such measures should alter the banks’ side of the foreclosure equation enough to provided added incentive to seek alternative, less drastic solutions…as well as providing municipalities extra revenue to support the strain on services arising from having a large number of vacant properties.

I realize that several lenders already have become rather proactive about helping their clients avoid foreclosure, and that those lenders also routinely face challenges of customer avoidance, confusion, or unwillingness to seek to save themselves.   But I do question whether such practices are the exception rather than the rule, or that consumers are adequately aware of such alternatives.

However, if consumers have to go through extra hoops to seek any sort of relief from debt issues, why shouldn’t the lenders be similarly constrained?