Hey Lawmakers: Slowing Foreclosures Hurts Housing

Today’s San Francisco Chronicle has a piece by Professor John B. Taylor of Stanford University on the negative consequences of the foreclosure-stopping bill passed yesterday by the California Legislature.

He says to get economic recovery going full steam, you have to clear excess inventory as fast as possible. And here’s what I posted on the Chronicle comments page: “Professor Taylor is spot on.”

Here are two possible outcomes from this law that may slow or stop foreclosures:

(1) loan servicers will reject loan modifications and pursue only foreclosures, or

(2) the length of time it will take for the housing market to recover will be increased by several years.

There is still much government support for high housing prices. The FNMA/FHLMC loan limits reflect where values were pre-bust. There are many government initiatives in place to stave foreclosure. HAMP and HARP are examples.

We are continuing to keep property values artificially high. Without these artificial supports, values would fall perhaps another 20%. Then homes would be affordable and building would start. The problem is that allowing that would cause significant losses to the banking sector. Then we’d be back to 2008-style contagion.

Slowing Foreclosures Will Harm Housing (SF Chronicle)

$XHB $XLF