The Corner

The Foreclosure-Moratorium Conundrum

The conundrum facing Democrats playing the populist foreclosure-moratorium card is shown clearly in a recent Washington Post story. In the continuing theme of demonizing the private sector, many congressional candidates are calling for stopping home foreclosures on a nationwide basis, regardless of the merits of individual cases.

To be sure, many mortgage companies and banks have broken ethical and possibly legal rules as they have been forced to come to grips with record levels of defaults. The problem is that many of these homes represent assets that are no longer worth their original purchase price. Someone has to write down the loss. There has to be a fundamental “reset” in the housing market, even though the consequences will be painful for homeowners and shareholders of financial institutions.

At the end of the day, financial institutions won’t be able to write down these losses until the existing mortgages are either revalued, renegotiated or foreclosed to enable resale. The same is true for the commercial real-estate market, which has barely even touched the radar screens of banks or politicians.

The real-estate industry in the U.S. is in the midst of a depression. The only way to get the industry back on a growth path is for assets to be re-valued at current market levels. A politically imposed national moratorium makes this process even more difficult and will prolong an already painful process. Indeed, it might ensure an even more protracted reset of the housing and commercial real-estate industry.

— Samuel R. Staley is Robert W. Galvin fellow and director of urban and land-use policy at the Reason Foundation.

Samuel R. Staley — Mr. Staley is director of urban-growth and land-use policy at the Reason Foundation and teaches urban and regional economics at the University of Dayton.


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