Posts
The handling of foreclosures in the recent housing crisis in the US has been a serious disaster. The drop in household income made that many households could not service their mortgage obligations and had to default. In addition, the drop in house values meant that many mortgages were worth more that the house that serves as collateral. This encouraged owners to walk away from payments. The mass of defaults lead mortgage servicers to resort to automatic treatment of foreclosures, leading to many errors, in particular foreclosing houses that not at issue. The reaction of many US states was to require longer foreclosure delays, first to make sure procedures are properly followed, second to allow owners to renegotiate, recoup and still make payments. The latter did not work out, as reported here previously. Were these state interventions worth it, in the end?
Larry Cordell, Liang Geng, Laurie Goodman and Lidan Yang use extensive databases of foreclosure procedures to quantify the lengthening of foreclosure delays and what this has cost. An important consideration is how foreclosures happen across states. In some, courts need to get involved (judicial states), in others the procedures only follow the stipulations of the mortgage contract (statutory states). In the former, the length of the procedure went from 26 to 44 months, in the latter from 16 to 22 months. During all this time, both parties are left in limbo, owners have incentives not to pay at all and neglect house maintenance, and lenders get no return on investment and may try to find whatever means to get any money out of the house, including reselling the mortgage. Also, there are externalities on neighborhoods as they get blighted. This is costly. The cost went up from 8% to 12% oh house value in statutory states, while it is from 17% to 30% in judicial states. These costs are estimated by adding unpaid property taxes, excess depreciation and unpaid insurance. This is thus the cost to the mortgage servicer, and does not even include capital costs. For a cost to society, one would also have to add the impact on other property values and deduct the fact that owners are living for free in these homes. There is no doubt the costs are considerable.
Larry Cordell, Liang Geng, Laurie Goodman and Lidan Yang use extensive databases of foreclosure procedures to quantify the lengthening of foreclosure delays and what this has cost. An important consideration is how foreclosures happen across states. In some, courts need to get involved (judicial states), in others the procedures only follow the stipulations of the mortgage contract (statutory states). In the former, the length of the procedure went from 26 to 44 months, in the latter from 16 to 22 months. During all this time, both parties are left in limbo, owners have incentives not to pay at all and neglect house maintenance, and lenders get no return on investment and may try to find whatever means to get any money out of the house, including reselling the mortgage. Also, there are externalities on neighborhoods as they get blighted. This is costly. The cost went up from 8% to 12% oh house value in statutory states, while it is from 17% to 30% in judicial states. These costs are estimated by adding unpaid property taxes, excess depreciation and unpaid insurance. This is thus the cost to the mortgage servicer, and does not even include capital costs. For a cost to society, one would also have to add the impact on other property values and deduct the fact that owners are living for free in these homes. There is no doubt the costs are considerable.
No comments:
Post a Comment