Mortgage industry fears foreclosure moratorium

Jan 25, 2008

Arizona economists and the mortgage industry bemoan the push for foreclosure moratoriums, claiming the free market should sort things out.

"I think it would be disastrous," said University of Arizona economist Gerry Swanson. He said the housing and mortgage markets need to weed out bad loans and home­owner debt, and a foreclosure freeze would stall those needed corrections.

"These problems won't go away," Swanson said.

Economist Tony Sanders of Arizona State University said recent interest rate cuts by the Federal Reserve Board have failed to jump-start the skittish housing market. He said foreclosure freezes and similar proposed changes would discourage new lending and investments in the housing and financial sectors, and would open the industry to more lawsuits.

Others go further, saying a long-term moratorium would diminish the market for investors who buy mortgage notes or trade securities on Wall Street.

"It could make that market dry up," said Joe Reed, director of mortgage lending at Family Housing Resources Inc. "You have investors that bought these notes expecting a certain rate of return."

Reed also worries about the message moratoriums send to homeowners, especially those who have been keeping up with their bills.

"Are you inviting people to not make their payments?" he said.

To combat the mortgage debacle, which is attributable in part to predatory lending and lax lending policies, Reed's Phoenix nonprofit launched a program to provide 100 percent financing for home buyers through a second mortgage.

Most large lenders consider Arizona an "at risk" area and are not offering maximum financing. Family Housing works with major lenders to supplement 5 percent of the loan amount so buyers can receive 100 percent financing.

Arizona has one of the worst foreclosure problems in the U.S. and a high number of subprime adjustable-rate loans. One of every 441 houses in the state is in the foreclosure process, according to Realty­Trac Inc.

Similar problems have hit major markets across the U.S., propelling calls for reform and moratoriums by Democratic presidential candidates Hillary Clinton and John Edwards. Clinton's plan would place a 90-day freeze on subprime foreclosures and a five-year hold on

adjustable-rate increases, according to her campaign.

Last week, the Minneapolis City Council passed a nonbinding resolution calling on lenders to stop foreclosures for three months. That followed similar nonbinding resolutions in San Francisco and Contra Costa County, Calif., and in Cleveland.

Last May, Massachusetts became the first state to pass a de facto moratorium on foreclosures. The Association of Community Organizations for Reform Now is pressing for a binding one-year moratorium in New York.

John Mathis, an international finance director at the Thunderbird School of Global Management in Glendale, said a foreclosure moratorium is a possible solution, but such a move would be pre-emptive without a complete market analy­sis.

Tom Osselear, chief financial officer of Phoenix-based Suburban Mortgage Inc., believes the market can correct itself and government intervention would delay the inevitable.

He said a moratorium would eliminate the rights of end-buyers to protect their properties and change the risk premium built into loan interest rates. Still, Osselear said a solution is needed for the lack of liquidity in the mortgage market -- a major reason behind its woes.

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