As the ‘foreclosure gate' saga continues, much of the coverage is focused on the potentially negative implications.
"The foreclosure process is likely to be dragged out further, prolonging the weakness in the housing market, consistent with a painful U-shaped recovery," writes BofA Merrill Lynch senior U.S. economist Michelle Meyer. "However, we admit that there is a heightened risk of a more dismal scenario: If negative momentum in the housing market kicks in, and feeds into the banking system and broader economy, it will be hard to fight."
Similarly, Noted bears such as Josh Rosner of Graham-Fisher and Chris Whalen of IRA have been quoted in various outlets warning that the foreclosure mess could put the financial system back into chaos. Meanwhile, The WSJ says the housing market recovery is in danger because buyers of distressed properties are "retreating to the sidelines amid growing uncertainty over the extent to which banks filed fraudulent foreclosure documents."
Such concerns are certainly legitimate (and legitimately scary) but there's a potential silver lining to the story, according to an unlikely source.
According to Tilson, approximately 11.5 million U.S. home mortgages are in danger of foreclosure, or about 20% of outstanding mortgages. Foreclosures anywhere near that total "would be devastating" to the economy and society in general.
The Mod Squad
Rather than pursuing foreclosures, Tilson says banks should modify mortgages based on current market levels. With 30-year fixed-rate mortgages around 4.30%, a combination of lower rates and reduced principal balance would put around 8 million of those "troubled" mortgages back above water, he estimates, providing homeowners with both an incentive and the ability to stay current on their loans.
To help banks offset the risk of these mortgage modifications Tilson suggests the U.S. government guarantee all the loans via Fannie Mae, Freddie Mac and FHA. Before you scoff about this being another taxpayer-funded bailout and moral hazard run amok, consider the U.S. government has provided Fannie and Freddie a blank check through 2012. In other words, taxpayers are already guaranteeing the mortgage market so homeowners might as well share more directly in the largess; Columbia's Glenn Hubbard made a similar point in his recent Tech Ticker appearance.
Of course, any fix to the housing crisis is easier said than done and there will be huge legal and political obstacles to overcome. But Tilson believes foreclosure is "the worst-possible outcome" for everyone - the financial system, homeowners and their local communities.
So anything that prevents more foreclosures is a good thing and if ‘foreclosure gate' helps get the government and banks to agree on "real" mortgage modifications, it might end up being the best solution to our national housing nightmare.
Lenders seized more U.S. homes this summer than in any three-month stretch since the housing market began to bust in 2006. But many of the foreclosures may be challenged in court later because of allegations that banks evicted people without reading the documents.
A total of 288,345 properties were lost to foreclosure in the July-September quarter, according to data released Thursday by RealtyTrac Inc., a foreclosure listing service. That's up from nearly 270,000 in the second quarter, the previous high point in the firm's records dating back to 2005.
Banks have seized more than 816,000 homes through the first nine months of the year and had been on pace to seize 1.2 million by the end of 2010. But fewer are expected now that several major lenders have suspended foreclosures and sales of repossessed homes until they can sort out the foreclosure-documents mess.
California accounted for nearly 21 percent of the nation's foreclosure activity in the third quarter, with 191,016 properties receiving some kind of notice
Today's U.S. Foreclosure Market Report says there were 930,437 foreclosure filings – which include default notices, scheduled auctions and bank repossessions – nationwide in the quarter ended Sept. 30. That was a nearly 4 percent increase from the second quarter but a 1 percent decrease from last year's third quarter.