Thursday, November 06, 2008

90 day moratorium

Our very own Arnie is proposing a 90 day moratorium on foreclosures in California. John Dizard thinks this is a terrible idea:
Let's take the 90-day moratorium idea. There are about 3m houses in the foreclosure process. During that 90-day moratorium, the mortgage servicing companies - that is the people who make the collection calls, do the restructuring and forward the payments to the mortgage securities owners - would have to continue to make up the missed payments. They would need to finance those payments by issuing notes, typically 360-day paper. Those servicers that were not bank-owned, and could not be financed by a parent holding company, would have to raise money at rates that are already high - say 600 basis points over Libor - and rising. If they could get the money at all.

If one of the non-bank servicers were to go bankrupt during the 90-day moratorium - a distinct possibility - the trusts holding the mortgages it was servicing would have to find new servicers. There would be a time gap during which no calls would be going out to delinquent homeowners. Past experience indicates that during the servicer disruption the foreclosure rate on a troubled pool would rise from 25 per cent to 35 per cent.
The key element that took Japan's equity and real estate collapse, and turned it into two decades (and counting) of economic stagnation was eliminating price discovery. In the US, housing has to come back inline with incomes before economic growth can resume. Right now, prices are below peak (leaving recent buyers and aggressive HELOCers underwater) but still above rent-equivalent levels. So there is financial pressure to sell, but a financial disincentive to buy. Keeping prices above their market clearing rate will just drag this crises on.

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