Focus on more efficient foreclosure process, GSE reform

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Friday, March 30, 2012

How can housing policy be responsive to today’s urgent needs (e.g., foreclosures, a sluggish housing market, affordability, etc.) and simultaneously address long-term trends (e.g., an aging population, growth of younger households)?

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The views expressed herein are those of the author and do not indicate concurrence by other members of the research staff or the principals of the Federal Reserve Bank of Boston or the Board of Governors of the Federal Reserve System.

I don’t think there is a tradeoff between the urgent and the long-term needs of the housing market. What the market needs is policy with clear, well-defined objectives and that’s true in both the short- and the long-run. Let me give two examples.

First, policy makers need to find ways to make the foreclosure process more efficient. As we argued in an earlier post, dragging out the foreclosure timeline does not prevent foreclosures but just delays the inevitable. Some might argue that delaying foreclosure “keeps property off the market” but it does not do so in a good way: seriously delinquent properties appear to depress prices almost as much as bank-owned properties available for sale. One policy option is to expand “power-of-sale” foreclosure to the 18 states that now prohibit it. Power of sale foreclosure avoids the courts and speeds up the foreclosure timeline dramatically while offering similar levels of protection to borrowers.* The nascent real estate revival in Arizona, a power-of-sale state, shows that a market can recover in the midst of a large numbers of foreclosure sales.**

Second, there are few benefits to delaying GSE reform. In 2008 and 2009, one could argue that the GSEs were making loans the private sector could not or would not extend. But making such a case is far harder now. In the past, Fannie Mae and Freddie Mac insured credit risk when private investors were unwilling. But now, the net effect of policies at Fannie Mae and Freddie Mac that force lenders to buy back defaulted loans is to push a large portion of credit risk into onto lenders and, in effect, into the private sector. Freddie Mac and Fannie Mae also no longer lead the market in terms of underwriting efficiency. In the 1980s and 1990s, Fannie Mae and Freddie Mac led pioneered automated underwriting and led the industry. Now the fact that portfolio lenders like Pentagon Federal Credit Union don’t need to deal with GSE underwriting is a selling point.

More than a year ago, the administration published a white paper laying out options for the GSEs. All involved making FHA the main instrument of housing policy and focusing the GSEs, if they remained, on the narrow task of providing liquidity to the mortgage market. Reforms along those lines would help the housing market both in the short- and the long-term.

The politicians in Washington have failed to tackle the housing crisis. The nation’s economy will not recover until they do. Paul S. Willen is Senior Economist and Policy Advisor for the Federal Reserve Bank of Boston.


* “Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process,” with Kristopher Gerardi and Lauren Lambie-Hanson. FRB Boston Public Policy Discussion Paper Series, paper no. 11-9, (2011). ** See “Rise in Phoenix Housing Shows Path for Other Cities,” Wall Street Journal, March 13, 2012.


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