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Policy Briefings: Are Delays to the Foreclosure Process a Good Thing?

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  • Higgins, Eric
  • Calomiris, Charles

Abstract

The United States faces a foreclosure crisis. The Mortgage Bankers Association reported that slightly more than four percent of the loans in the United States are in the foreclosure process as of the third quarter of 2010. RealtyTrac reported in January 2011 that nearly three million homes received foreclosure filings in 2010. In addition to the current foreclosures, there exist a substantial number of potential foreclosures that will occur in the next several years. Goodman (2010) estimates that there may be another seven million homes that will face foreclosure. CoreLogic estimated that nearly 23 percent of all mortgages are underwater as of the third quarter of 2010. This number spikes in the areas hardest hit by the mortgage crisis. The sheer volume of actual and pending foreclosures coupled with a slowdown in the foreclosure process due to legal and political wrangling has increased the time that a home is in foreclosure. The purpose of this policy briefing is to analyze the economics of delaying the resolution of the foreclosure process. We review the literature relating to the macroeconomic effects of delaying foreclosures. We begin by identifying four types of potential costs of delay. First, foreclosure delays inject uncertainty in the consumer balance sheet, which leads to unnecessary and economically damaging delays in consumption. This reverse-stimulus alone could dwarf any further plausible price effects of delaying foreclosures at this stage of the business cycle. Second, delaying foreclosures could impede new housing construction. Housing construction is predicated upon a positive and consistent upward price gradient in the housing market, which will not be established until the market is cleared of delinquent homes. Third, and similar to a consumer’s balance sheet, delaying foreclosures creates uncertainty in banks’ balance sheets, potentially blocking channels of credit and undermining lending. Fourth, delinquent homes that are heading to foreclosure have been shown to aggravate neighborhood blight.

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Bibliographic Info

Paper provided by Regulation2point0 in its series Working paper with number 641.

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Date of creation: Feb 2011
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Handle: RePEc:reg:wpaper:641

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Web page: http://regulation2point0.org/

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  1. Mayer, Christopher J. & Somerville, C. Tsuriel, 2000. "Residential Construction: Using the Urban Growth Model to Estimate Housing Supply," Journal of Urban Economics, Elsevier, vol. 48(1), pages 85-109, July.
  2. Atif Mian & Amir Sufi & Francesco Trebbi, 2011. "Foreclosures, House Prices, and the Real Economy," IMES Discussion Paper Series 11-E-27, Institute for Monetary and Economic Studies, Bank of Japan.
  3. Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why don't lenders renegotiate more home mortgages?: redefaults, self-cures, and securitization," Public Policy Discussion Paper 09-4, Federal Reserve Bank of Boston.
  4. Neil Bhutta & Jane Dokko & Hui Shan, 2010. "The depth of negative equity and mortgage default decisions," Finance and Economics Discussion Series 2010-35, Board of Governors of the Federal Reserve System (U.S.).
  5. Barrell, Ray & Davis, E. Philip & Pomerantz, Olga, 2006. "Costs of financial instability, household-sector balance sheets and consumption," Journal of Financial Stability, Elsevier, vol. 2(2), pages 194-216, June.
  6. W. Scott Frame, 2010. "Estimating the effect of mortgage foreclosures on nearby property values: a critical review of the literature," Economic Review, Federal Reserve Bank of Atlanta.
  7. Tammy Leonard & James Murdoch, 2009. "The neighborhood effects of foreclosure," Journal of Geographical Systems, Springer, vol. 11(4), pages 317-332, December.
  8. Daniel Hartley, 2011. "The effect of foreclosures on nearby housing prices: supply or disamenity?," Working Paper 1011, Federal Reserve Bank of Cleveland.
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