Yesterday, I wrote about the call of leading Democrats for a national moratorium on foreclosures. They base their call on sloppy paperwork and technical procedural irregularities on the part of lenders during the foreclosure process. But an extended moratorium might well inflict significant damages on both the housing market and the financial industry.
Today, the Washington Post reports that the Obama administration received repeated warnings about, and was aware of, the flaws in the foreclosure process that are behind the call for the moratorium. According to the Post, the administration did not sufficiently address the danger, in part because it wanted the help of lenders in carrying out federal programs to modify mortgages that were in default.
What was the tension between modifying some mortgages and handling foreclosures properly? The answer seems to lie in lack of resources on the part of lenders. Citing government officials, the Post says that the procedural irregularities resulted in part from the fact that mortgage servicers were simply overwhelmed. Meanwhile, the loan workouts the Obama administration was pushing for under its House Affordable Modification Program placed additional burdens on mortgage servicers.
Thus, it appears that the Obama administration chose to tolerate the irregularities that now threaten the housing market and the financial industry because it preferred that banks use their limited resources to focus on giving breaks to folks who couldn’t pay their mortgages, rather than on handling foreclosures properly.
I don’t know whether the irregularities in question justify an extended moratorium on foreclosures. But if they do — or even if they don’t, and we still end up with such a moratorium — then it looks like the Obama administration will bear considerable blame for the consequences.
UPDATE: We’ve received many thoughtful emails that are helping me understand what is a complex situation. Thanks to all of you who have written to us.
One reader, a former mortgage portfolio manager for a major bank, confirms that lack of resources at lending insititutions has been and remains a major driver of the present difficulties:
The loan servicers were set up to anticipate a certain level of foreclosures – say 1-2% for prime borrowers, 3-5% for Alt-A borrowers, and perhaps 8-10% for subprime. Each loan servicing operation has a department set up to do that work, but their caseloads have grown to a point where many are probably out-of-control at this point – there is not an unlimited supply of experienced people at these various servicing centers.
Our reader suggests that the foreclosure moratorium may therefore be necessary if banks are to regain control of their own operations, and he speculates that Bank of America may have imposed such a moratorium on itself for that reason, rather than because of political pressure.