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The Pernicious “Foreclosures are Good” Meme

The New York Times editorial board has an appropriate take today on the barrage of housing-related spin coming from all corners lately. If you follow these issues, you would have to be willfully blind not to notice a concerted effort to paint the housing recovery as just around the corner, the bottom reached, the best yet to come. But the NYT, to their credit, doesn’t buy the spin.

In the last quarter of 2011, national home prices fell 4 percent, putting prices back to levels last seen in mid-2002, according to the Standard & Poor’s/Case-Shiller price index. Moody’s Analytics estimates that 3.3 million homes are in or near foreclosure and another 11.5 million underwater homeowners are at risk of foreclosure if the economy or their finances weaken.

And you can add to that the fact that foreclosure starts and sales have ramped up again, as the regulators eased off the pressure by agreeing to the foreclosure fraud settlement. Some would buy the bank-friendly argument that these foreclosures are necessary, that they “let the market clear.” We’ve heard this a lot, that foreclosures are good. I’m surprised any economist still tries this line of argument. A foreclosure drops property values, increases state and local government costs in the case of blight, and wrecks entire communities. One foreclosure causes $250,000 of damage to the larger economy. And a good deal of them are unnecessary, and could be avoided simply with the time-honored process of renegotiating contracts in a way that works financially for the borrower and lender. What’s more, simple supply and demand dictates that throwing more vacant properties on the market when it’s already distressed doesn’t help anyone. In fact, it robs current homeowners of their equity. Households lost $213 billion in real estate value in just the last quarter alone. More negative equity, incidentally, adds to the downward spiral of more foreclosures, more supply, and lower prices, leading to more negative equity.

Certainly the Administration wouldn’t take the public view that foreclosures are good, even if their policies privately reflect that. They claim that the settlement will provide meaningful relief to borrowers, and their new new fraud investigation will provide more. NYT isn’t buying that either.

The main component of the administration’s new efforts is the recent foreclosure settlement between the big banks and state and federal officials […] The settlement was announced nearly a month ago, but the specific terms have yet to be released. One concern is that banks may have leeway to tailor loan modifications in ways that help them clean up their balance sheets, while leaving many homeowners deeply underwater. Another is that states may be able to use money from the settlement for purposes other than foreclosure relief.

The investigation that is supposed to be the powerful follow-up to the settlement has also gotten off to a worryingly slow start. Announced in January by Mr. Obama, it still has no executive director, raising questions about the administration’s commitment to truly holding the banks accountable. The longer it takes to do an investigation, the longer it will take to secure verdicts or settlements that would include money for further antiforeclosure efforts.

And the more incidents will reach their statute of limitations.

Some housing analysts are in their fourth straight year of predicting a rebound in the market. But nothing meaningful has been done to change incentives and to deliver relief to those who need it.

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David Dayen

David Dayen