October 29, 2010

Why We Need a Foreclosure Moratorium

Following an all-too-brief period of public scrutiny, Bank of America announced last week that it’s back to business as usual, resuming 102,000 foreclosures in 23 states. Like several of the other large mortgage servicers, the bank had voluntarily frozen foreclosures earlier this month in light of revelations that its agents had not followed proper procedures in foreclosing on homeowners. With voluntary efforts to stem the foreclosure crisis falling short time and again, we now should consider a national moratorium.

I have heard from constituents being ignored and abused in the foreclosure process: documents repeatedly lost, inconsistent advice, hours trapped on the phone, and common sense turned on its head to reject fair modifications in favor of foreclosure. I have heard from mayors about the terrible collateral cost to communities from foreclosure. I have watched the big loan servicers drag their feet in the Obama Administration’s well-intentioned mortgage modification program. And most recently, we have all learned that these companies have been playing fast and loose in their foreclosure process, carrying out foreclosures in the cheapest manner possible, often outsourcing the process to a “foreclosure mill” document processing company.

Trapped in administrative purgatory, real families suffer when the big banks and their servicers force foreclosures. Children pack up their rooms; parents struggle to find a temporary roof. We owe these families a fair chance to stay in their homes, and a humane, logical and orderly foreclosure process if all else fails.

The system is simply not working logically when it cannot answer the question, “why is the bank throwing me out of my house, to sell it to someone else who’ll pay LESS than I’m willing and able to pay right now?” Slicing and dicing these mortgages into securities, and selling them to the four winds, has fractured the marketplace and introduced shards of perverse incentive. Misaligned fee structures have led loan servicers to reject mortgage modifications that would benefit both the homeowner and the mortgage holders. When a homeowner is “underwater” and willing and able to make payments on a rewritten mortgage with reduced principal, why would the loan servicer decline, and throw the home into a foreclosure that ravages its value? Present practices are injurious not only to the homeowner, but often to the owners and investors in the mortgage.

Much of the commentary against a foreclosure moratorium presupposes a false premise: that it’s this broken, illogical foreclosure system or nothing. Whether through foreclosure counselors, mandatory mediation, state courts, or bankruptcy proceedings, there are innumerable ways to do it better — more logically, more humanely, with less collateral damage. What’s hard to imagine is how we could do it worse.

A national foreclosure moratorium will force loan servicers to look at the broader economic realities of foreclosure. Far from “delaying the inevitable” as some commentators have suggested, a national moratorium on foreclosures would force loan servicers to reevaluate their practices, and clean up the bureaucratic nightmare they now run.

The foreclosure crisis was worsened by the big banks blocking our attempts in Congress to permit bankruptcy courts to “mark to market” mortgage principal on primary residences — the way they do for loans on vacation homes, cars, and boats. We in Congress should revive this bankruptcy legislation, and other proposals to help homeowners, such as mandatory pre-foreclosure mediation

The mortgage companies did it their way for the last three years, and created nightmare, agony and frustration. Now it’s time to scrap their failed approach and chart a more reasonable path forward for our housing market and its struggling homeowners.

By: Sheldon Whitehouse