* Borrower protection laws hold back recovery, some
* Housing slump worse in states with judicial protection
* Economic assessments don't consider pain for those in
By Tim Reid
June 27 U.S. state and federal laws enacted to
protect homeowners from eviction in the wake of the 2008 housing
crash may be extending the slump, according to a growing number
of economists and industry experts.
Foreclosures have all but ground to a halt in Nevada, which
passed one of the stiffest borrower-protection laws in the
country last year. Yet the housing market is further than ever
from recovery, local real estate agents say, with a lack of
inventory feeding a "mini-bubble" in prices that few believe is
A recent U.S. Federal Reserve study found that in states
requiring a judicial review for foreclosure, delays associated
with the process had no measurable long-term benefits and often
prolonged the problems with the housing market.
Data from housing market researchers points to similar
"Many state laws that stretch out the period for legitimate
foreclosures result in no added benefit for the homeowner and
produce harm to the housing finance system and to
neighborhoods," said Alfred Pollard, general counsel to the
Federal Housing Finance Agency, at a House of Representatives
oversight hearing in March.
Some people who have been able to stay in their homes
despite failing to pay their mortgages may disagree, but it may
be a different matter for the neighborhoods where they live.
An overhang of properties that the banks want to foreclose,
but have not dared to, not only can hold back a sustainable
recovery in prices but also might encourage blight as the
defaulting borrower has less incentive to keep the property in
"Folks with negative equity can't sell their home and are
less likely to invest in improvements or repairs, or pay their
property taxes," said Sean O'Toole, chief executive officer of
ForeclosureRadar.com, which tracks foreclosures.
The increasing doubt about the impact of anti-foreclosure
laws on the long-term health of the housing market calls into
question a basic principle of the Obama Administration's
approach to the housing crisis.
Many Democrats, including Obama, say struggling homeowners
should get more time to make good on their mortgage arrears, or
have the breathing room to renegotiate their loans with lenders,
especially in the wake of the "robo-signing" scandal in which
banks were found to have falsified foreclosure paperwork.
In the latest expression of this philosophy, the California
legislature, at the urging of Attorney General Kamala Harris, is
poised to pass a "homeowners bill of rights" that would mean new
requirements for lenders looking to foreclose.
And certainly many consumer advocates say that forcing banks
to mediate with those behind on their mortgages rather than
foreclosing on them has reduced the pain and sense of
dereliction in many communities.
But conservative and free market economists have long been
passionate in their belief that the foreclosure process should
be allowed to work efficiently. Delays in clearing the huge
backlog of distressed properties will only push back a
meaningful recovery of the housing market, they say.
According to the National Conference of State Legislatures,
a bipartisan organization serving the legislators of all 50
states, more than 400 foreclosure laws were enacted across the
United States in 2011 alone, and most slowed down the process.
The Nevada law, passed in October, may be the most
stringent: It imposes criminal penalties on lenders that try to
foreclose without the proper paperwork. That has led to a
dramatic drop in foreclosures in a state that was among the
hardest-hit by the housing crash.
In September, banks filed nearly 5,000 foreclosure notices
in Nevada. By February, just 460 were served, according to
online foreclosure property marketplace RealtyTrac.
Ricky Beach, a real estate agent in Reno, Nevada, said the
new law, AB 284, "has pretty much killed the market here." The
lack of foreclosure activity has led to a dearth of inventory,
he said, with the number of homes for sale in the area down to
778 today from more than 1,700 in September.
This has triggered a "mini-bubble" in housing prices because
the few properties available are receiving multiple bids. The
only problem: No one thinks the gains are sustainable.
"The bill did nothing to solve the crisis - it's just
prolonged it," Beach said. "Sooner or later the banks will work
out how to deal with the law. And then foreclosures will hit the
market, and prices will crash back down."
Malik Ahmad, a Las Vegas foreclosure defense lawyer who has
spent the last six years trying to help vulnerable borrowers
deal with unscrupulous banks, said the law had completely
changed his view of the nature of the crisis.
"This law has become a mockery," Ahmad said. "I am now
turning down clients every day who I know have no intention of
ever trying to pay their mortgage. They just want to stay in
their homes for free. And that is a bad situation for everyone,
lenders and homeowners."
In a statement, Nevada Attorney General Catherine Cortez
Masto said: "AB 284 was enacted to address one aspect of the
troubled housing market - the fact that certain banks and
mortgage loan servicers were attempting to use Nevada's
nonjudicial foreclosure process to foreclose on Nevadans' homes
without documenting that they had the right to do so."
The law has certainly helped some homeowners.
Bernardo Becerra recalls that on Sept. 29 - two days before
the law took effect - Bank of America Corp initiated
foreclosure proceedings against his Las Vegas home. He had last
paid his mortgage in May 2009 on loans totaling $550,000, but
for a house now valued at $348,000. When he took out the loans
in May 2006, his home was worth $700,000.
Becerra says Bank of America has not pursued the
foreclosure, and for the first time in three years seems willing
to consider a loan modification.
Yet comparisons with nearby Arizona and other states with
few barriers to foreclosure suggest that homeowner protection
laws can delay a market recovery.
At the request of Reuters, RealtyTrac compared three states
where borrower protection laws had prolonged foreclosures -
Florida, New Jersey and New York - with three with fewer
protections and where foreclosure completion times were shorter
- Arizona, California and Virginia.
In the three states with the shorter delays, the average
sale price for foreclosed properties has been trending higher,
suggesting a recovery that has underlying strength.
In Florida and New Jersey, home prices rose last year as
foreclosure activity greatly slowed after the robo-signing
scandal. But in the last few months, RealtyTrac says,
foreclosure activity has picked up there after a settlement
between major banks and the U.S. government over robo-signing -
and home values have started to drop.
RealtyTrac Vice President Daren Blomquist says the data
shows that delaying the foreclosure process in Florida and New
Jersey created a mini-bubble, followed by another price drop,
and had thus merely prolonged the housing slump in those states.
A study by three Federal Reserve economists compared the
foreclosure processes and outcomes for borrowers in the 20
"judicial" foreclosure states - where banks must seek court
approval before they can foreclose - and the 30 "nonjudicial"
ones, where such court oversight is not required.
Their December study of foreclosure outcomes from 2004 to
2011 was published by the nonpartisan National Bureau of
The economists also looked at Massachusetts, where a 2008
"right to cure" law gives borrowers more time to make good on
their mortgage arrears and has greatly extended the time it took
banks to foreclose.
Their conclusion? States with judicial protection over the
foreclosure process or the arrears system "indiscriminately"
slowed down the foreclosure process, but with no measurable
In fact, delinquent borrowers were more likely to make good
on their arrears in nonjudicial states than in states where they
had more time to do so. These borrowers were also just as likely
to be repossessed in a judicial state than in a nonjudicial one
- it just took longer.
Foreclosure protection laws also probably led to an
increased incidence of blight, the economists found.
Lauren Lambie-Hanson, one of the Federal Reserve economists,
said delays in foreclosures had scared off potential buyers
because prolonging the process raised doubts about how clean the
title to a property was.
A cornerstone of President Obama's effort to ease the
foreclosure crisis has been the Home Affordable Modification
Program, which was intended to help eligible borrowers get loan
modifications that will allow them to stay in their homes.
The 4-year-old program has had limited success. It was
devised to target at least 4 million struggling homeowners, but
only 523,000 have received loan modifications, according to
government figures. Of those, a third have fallen back into
delinquency or subsequently been foreclosed upon.
Overall, 2.2 million American borrowers have lost their
homes to foreclosure since July 2009. Another 720,000 are in
some stage of foreclosure, according to RealtyTrac.
The question of how much help to give homeowners in danger
of foreclosure has become a major talking point in the
presidential campaign. Obama touted his loan modification
program in a campaign speech on Friday.
A senior White House official told Reuters: "There are lots
of families out there who with some targeted help can avoid
foreclosure, which is hard on the economy. So providing that
relief is not just good for these families, it's good economic
Mitt Romney, the Republican presidential nominee, has
expressed a different view. "Don't try and stop the foreclosure
process," he said while campaigning in Nevada last year. "Let it
run its course and hit the bottom."
Since then, he appears to have moderated his stance, stating
that banks should provide more help to borrowers "who have
circumstances that would justify renegotiation" of their loans.