As the number of foreclosures continues to increase, so do the questions as to what may be done to combat the epidemic. On one end of the spectrum are those who believe that nothing should be done – that homeowners were irresponsible in taking out loans they should have known would be difficult to repay. At the other end are those clamoring for government intervention.
Across the country, politicians are attempting to alleviate the crisis: Several states have proposed legislation designed to slow the foreclosure process, including a recent proposal by Gov. Arnold Schwarzenegger, R-Calif., to require lenders to wait 90 days before initiating foreclosure. The federal government has also indicated a willingness to intervene. One plan that the FDIC is considering would require banks to offer reduced interest rates to struggling homeowners.
Aside from government intervention, some lenders are taking voluntary steps to ameliorate the crisis. More and more lenders are stepping up efforts to implement formal foreclosure and eviction moratoriums during the holiday season. Such moratoriums do have limited benefits, but at the same time, they carry the potential of harming both homeowners and lenders.
Benefits of holiday moratoriums
An overarching benefit of holiday moratoriums to homeowners is psychological in nature. The holiday season is a time during which people are supposed to enjoy their family and friends while, if only temporarily, shedding many of the financial pressures that have recently marched directly from Wall Street to Main Street.
A homeowner, naturally hard-pressed to tell his or her family and friends about a foreclosure or possible eviction, would likely find it much more difficult to do so during the holiday season. Such a homeowner would certainly appreciate the respite provided by a holiday moratorium.
Moreover, some homeowners are able to use the additional time provided by the moratorium to secure the funding necessary to keep their homes. Barring this, other homeowners are at least able to locate an alternative residence using the cushion of the holiday season. Those few weeks may mean the difference between living in a shelter or in an otherwise acceptable living environment.
Lenders may be the ultimate beneficiaries of holiday moratoriums. Whether rational or not, much of the public perception of the foreclosure process is that greedy lenders are evicting helpless people instead of taking steps to modify their loans. Consequently, consumer advocates place pressure on lawmakers to push for loan modifications.
By refraining from foreclosing or evicting during the holiday season, lenders are able to demonstrate to the public that they are not cold and calculating corporate automatons. Reduced public rancor toward lenders, in turn, leads to a lower threat of government intervention, as politicians are under less pressure from their constituents.
Potential for harmful fallout
In spite of the benevolent intentions behind the moratoriums, in some cases, they could actually cause harm to the very homeowners they are intended to assist. Without more assistance, the moratoriums in and of themselves will merely prolong the inevitable for many homeowners. Homeowners who are unable or unwilling to make their payments in November are not likely to be able or willing to begin making them again in January.
Many debt instruments specify that borrowers are responsible for interest accrued until the end of the foreclosure process. Prolonging this process may result in increased indebtedness, as many homeowners may not have the discipline to set aside the additional funds that may be required after the moratorium has expired.
Lenders, too, may be harmed by holiday moratoriums. Of obvious note is the opportunity cost of delaying the process. Every day that lenders retain unsold properties costs them, at a minimum, the returns on investment capital they could have received from investing in productive assets.
While the opportunity cost of delaying foreclosure on a single property may not seem significant, when viewed in the aggregate – lenders began foreclosure on 565,000 homes in the third quarter of 2008, according to HOPE NOW – holiday moratoriums can result in substantial costs to lenders. The counter-argument is that lenders can theoretically recoup those costs if there is a successful loss mitigation event.
However, considering the number of foreclosures that are accompanied by bankruptcy proceedings (the result of which is to temporarily limit a lender's recourse to the sale of the property), the reality is that lenders will be left to absorb a large amount of these opportunity costs, and the imposition of a holiday moratorium only serves to exacerbate lender losses.
Another peril to lenders is that of waste, neglect or vandalism to the properties. Many areas of the country experience subfreezing temperatures during the holiday season. A moratorium may jeopardize a lender's ability to properly maintain and secure a property if a homeowner suddenly and unexpectedly vacates the property.
Additionally, it is a sad truth that many homeowners, when notified of a lender's intent to foreclose, proceed to vandalize their own home out of spite to the lender.
For example, in Las Vegas, as many as 25% of foreclosed properties are deliberately damaged by angry homeowners, according to a report by the Las Vegas Review Journal. Such damage can cost as much as 10% of the property value to repair. Moratoriums can provide angry homeowners with more opportunity to inflict damage upon the property.
Holiday moratoriums may seem to be an easy way for lenders to spread some cheer and happiness and decrease the threat of government regulation. However, these moratoriums carry with them the potential for harm to homeowners and lenders alike. Lenders should carefully consider the ramifications of delaying the foreclosure process when deciding if – and for how long – they wish to implement such measures.
Randall Wharton is an associate attorney in the Wichita, Kan., office of creditors' rights law firm South & Associates PC. He can be reached at (913) 663-7600, ext. 321 or firstname.lastname@example.org.