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 sustainable. 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 conclusions. "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 good condition.
"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 September 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 Economic Research. 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 benefits. 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 policy."
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.