Foreclosure Moratoriums: It's Time to Get Real

Includes: C, FMCC, FNMA, JPM
by: Markham Lee

Let's take a look at Citibank (NYSE:C), J.P. Morgan (NYSE:JPM) and the Mortgage GSEs' plans to temporarily suspend foreclosure proceedings:

(From the Associated Press): "WASHINGTON – JPMorgan Chase & Co. and Citigroup Inc. are expanding their efforts to halt home foreclosures while the Obama administration develops its plans to help the U.S. housing market.

JPMorgan Chief Executive Jamie Dimon said the New York company plans to halt new foreclosures for owner-occupied home loans through March 6. Dimon made the pledge in a letter to Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, who released it on Friday.

"This moratorium replicates the 90-day foreclosure freeze we announced on Oct. 31," Dimon wrote. "We believe three weeks is adequate time for the Treasury to announce — and for us to implement — a new plan."

Citigroup's foreclosure moratorium applies to all "Citi owned first mortgage loans that are the principal residence of the customer as well as all loans Citi services where we have reached an understanding with the investor" until President Barack Obama's administration has finalized the details of the loan modification program or March 12, whichever is earlier, according to a company release. New York-based Citi's action expands on a similar effort that it started in November.

Frank on Wednesday called on the mortgage industry to enact broad foreclosure moratoriums, and executives from the nation's largest banks committed then to such action…

...Government-controlled mortgage finance companies Fannie Mae and Freddie Mac suspended foreclosure sales during the winter holidays and have halted evictions from foreclosed properties until next month. And earlier this week, John Reich, director of the Office of Thrift Supervision, urged the more than 800 thrift institutions nationwide to do the same.

Meanwhile, the administration is considering spending taxpayer dollars to cut monthly payments for homeowners on the verge of foreclosure."

There are a couple of problems here:

Suspending a foreclosure is of no help to someone who bought a house they couldn't afford, giving them more time isn't making the payments going away, nor is it helping the person increase their income. As a result all you're doing is to do delay the inevitable and possibly creating a situation where the impact of the eventual foreclosure will be even worse. The smart thing to do is to help these people get into a sustainable and affordable housing situation, not help them to perpetuate a bad one.

It's glaringly obvious that the government (and others) are refusing to face the facts around the mortgage crisis: people bought homes they can't afford and no amount of "loan modification" can change that. Hence the reason that 36% of all modified mortgages are 30 days or more past due after 90 days, meaning that many of the people whose mortgages were modified struggled to make even one payment.

Subsidizing Mortgages with taxpayer dollars should be a non-starter, it shouldn't even be on the table. What's the government going to do, subsidize someone's mortgage until they build up their income and/or pay the mortgage off? Are they going to make lump sum payment to reduce principle so they person can refinance with a lower payment?

Considering that we're in a crisis caused by irresponsible behavior on the part of lenders and borrowers, does it really make sense to both subsidize and encourage future irresponsible behavior that could very well be the cause of our next economic crisis? If we want to have a stable economy in the future we have to encourage people to behave in a manner that's both responsible and sustainable.

Furthermore how can our Congress (and the average citizen for that matter) have the moral authority to deride Wall St. for executive pay, perks, private jets, etc, when the same amount of outrage doesn't exist for bailing out irresponsible citizens?

I didn't realize that this was the United States of Hypocrisy, I'm starting to think that some people only believe in personal responsibility, self-reliance, etc, when it's convenient.

Prolonging the problem: the decline in housing prices isn't going to stop until the foreclosure problem has run its course, and prices have declined to pre-housing boom levels. Artificial methods of propping up the housing market are only going to prolong the very problem that these fatuous tactics are trying to prevent.

Instead of trying to prevent the foreclosure problem the government should focus its efforts on getting people into affordable housing situations, not only will this help the housing market reach bottom faster but the people who are struggling to keep their homes will find themselves better off in the end.

You can read more here(NYSE:AP) and here (WSJ); Dimon's letter to the government is available here.


The Associated Press: "JP Morgan, Citigroup halting foreclosures" -- Alan Zibel, February 13, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.