What Does a Foreclosure Moratorium Mean for the Housing Market?

About 30% of home sales are distressed properties.  Closings and future purchase contracts on distressed properties may not take place while a foreclosure moratorium is in effect to sort out title and foreclosure issues with recent vintage mortgages.  And a moratorium for sure would mean foreclosures in the pipeline would be held up.  This could greatly delay finding the bottom for the residential real estate decline.

In fact, resale of any property with a mortgage that has been securitized may not go forward because of title questions.  This could happen even if the sale is not distressed.  Since securitization was widespread over the past decade, the only houses that may be transferable with cleared and insured titles are those with old fashioned mortgages, perhaps only sales before 2005.  Yves Smith of Naked Capitalism has suggested that the shortcuts in documentation, which started perhaps a decade or more ago, became widespread by 2005.  Smith has been a most diligent daily reporter on the foreclosure problem for months and has a summary article just published.

Thus mortgages more than six years old may be sorted out and those properties could become salable sooner than newer mortgages. However, with all the mortgage refinancing that has occurred in the past two years, many of those who have owned their homes much longer than the six years may still have very recent mortgages because of refinancing.  Refinancing may have created a salability trap for many people.

Anecdotal tales of real estate deals going bad are starting to show up.  One report was written by Andrew Martin and David Streitfeld in The New York Times.

Here is one scenario resulting from a foreclosure moratorium:  Sales volume may go down sharply because properties can not qualify for mortgages until the seller’s mortgage status is sorted out.  Those that can buy for cash and are willing to assume the title risk may be able to get a fire sale offer accepted.  But this is likely to be a relatively small number of buyers.

Those properties that have clear mortgage documentation will demand a premium in price.  Therefore, the more mortgage and title questions effect marketability, the more the median and average home price is likely to go up.  Those that feel they absolutely have to buy a home will be competing for a much smaller supply.

This may be a boon to home builders.  Provided their land, building and development loans have not been securitized, new homes will represent one of the few sources of clear title for a home buyer.

If this foreclosure moratorium becomes entrenched for several months, home sales will virtually dry up.  Those homes that are available with a clear title will demand a premium and drive prices up.  But this is a temporary effect.  The mess will be sorted out and then what?  If we name the process “King Moratorium” and ascribe the ability to speak, he might say:  “ Apres moi, le deluge!”Once the title question is resolved, there will be a pent up demand and home sales will soar.  But because the supply will be a deluge, prices will fall, probably well below the level they are currently.  To avoid the severe price drop would require that employment increase dramatically.  Such a change can not be projected from current trends.  Demand will most likely fall well below the supply that will flood the market.

What is likely to happen?  Here is a possible sequence:

1.  Home sales drop , but prices rise; then

2.  Inventory floods the market as title issues are resolved; then

3.  Home sales rise, but not enough to meet the supply; then

4.  Home prices plummet.

These four steps will not get us to a much different place than we would have gotten with a more orderly market.  But the timeline may be distorted (price bottom may come later) and the number of individual financial dislocations occurring is likely to be greater than would have been otherwise.

Business Insider has offered a similar outlook, as has Mike Shedlock.  On the other hand there are views that this is not such a big deal.  And Bob Lawless points out at Credit Slips that those who have purchased homes (or will purchase) should not have title problems because of the legal finality of foreclosure sales.  The major problem is what will happen to the millions of foreclosures in process or yet to be initiated.  Any complaint of a foreclosed party for improper action should not apply to the buyer of the foreclosed property but only to the agent (presumably a bank) that obtained the foreclosure.  Marc Gerstein has advised that, with regard to properties that have already completed foreclosure, “We all need to calm down.”

If your head is spinning after you have read all this and followed the links to the excellent articles referenced, you can get a good summary of the structure of the securitization process and the foreclosures for those securitized defaults by reading an excellent article by Mike Konczal.  His diagrams alone are worth a visit to the article.

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