The populist rage generated by foreclosure-gate — the scandal around the widespread mismanagement of foreclosure documents — will likely grow in the wake of Bank of America’s recent announcement that it will slowly resume its foreclosure processes. This move prompted the editors at the New York Times to call for a national foreclosure moratorium last week, and others have joined that chorus. But grinding the foreclosure process to a halt would only hurt the housing market, create more problems for taxpayers, and slow the recovery.
The first problem is that a nationwide halt to the foreclosure process would undermine the rule of law. Oddly enough, both the banks and their critics are guilty of this. Foreclosure is a nasty thing. No one with a soul wants to see a family kicked out of the home they’ve been occupying. Nevertheless, pre–“foreclosure gate,” the banks were appropriate in following the law and reclaiming properties that were in default. Banks have a duty to their shareholders — other taxpayers and families — to salvage as much as they can from their investments.
However, banks cannot excuse away the fact that paperwork was mishandled over the past five years. The banks shouldn’t hold themselves to a different standard than they do their customers, like those that lose track of their finances and get hit with overdraft charges. It is going to take a long time, but, where necessary, banks will need to take the time and work out all of the claims, forms, and notes to be fair in their foreclosures.
On the other hand, pre–“foreclosure gate,” bank critics argued that it was immoral to uproot children and force people from their homes. It didn’t matter that there was a legal contract. It didn’t matter that many of those in default had paid down little to no part of the principal. It didn’t matter that the banks were the real owners of the home. Local officials barred banks from following through on foreclosures in some cases. Other states issued temporary moratoriums. Congress even considered “cram down” legislation that would allow judges to break contracts and force banks to take principal-reduction losses so that families could stay in the homes they had purchased with bank money.
But now, those critics are happy to point to the letter of the law — i.e., the paperwork wasn’t done properly and “robo-signers” rushed the process for handling a home foreclosure — to drag the foreclosure process out for as long as possible.
This dual double standard is what can inspire a misguided foreclosure-moratorium claim. But the reality is that neither side should try to be opportunist.
On robo-signing: Only a handful of cases have been brought to light indicating that banks foreclosed on a home where the payments had been made. A few dozen cases does not a crisis make. Even a few hundred wouldn’t be a pervasive problem, given the millions of mortgages in America.
Paperwork tracking is a different story: If banks don’t have the proper paperwork, they shouldn’t move forward with the foreclosure process — even though this would hurt the banks and the broader economy. However, if they do have the paperwork, then the foreclosures should go forward. Banks need to get this right, but that doesn’t mean that foreclosure-gate problems should halt the whole machine in the meantime.
— Anthony Randazzo is director of economic research for Reason Foundation in Washington, D.C.