Avoiding Unintended Consequences – Sometimes Foreclosure is the Best Option

Stakeholders throughout the housing and mortgage finance industries are focused on finding the proper response to the COVID-induced crisis that will inevitably lead to massive mortgage defaults.  FHFA, FHA/HUD and state governments have been quick to declare moratoria on foreclosures and evictions.  Legislation has been proposed in the U.S. House of Representatives attempting to staunch the tsunami of foreclosures and evictions that are predicted to follow the expiration of the current moratoria on August 31. 

Many observers believe that the expiration will be extended given the slow pace at which Congress is likely to take up, pass and reach compromise on a bill that would address the complexities involved.  How should the system deal with the massive number of loans coming out of forbearance?  How will we fund a credit facility to protect loan servicers and lenders responsible for making periodic advances to bondholders, units of local government and to pay insurance?  It is also uncertain whether any bill that addresses these broad and complex issues could pass and whether the President would sign it.  We therefore believe that the August 31 sunset of the existing moratoria should be and will be extended.

While the House and Senate are considering various versions of proposed legislation, it is important to avoid unintended negative consequences associated with the passage of the time necessary to enact and implement effective legislation and the urge to treat all default circumstances with the same remedies.

The risks of time delay are particularly acute in the reverse mortgage industry, where the additional time afforded borrowers as a protection against the strains caused by the COVID-19 pandemic through extended forbearance periods can have unintended negative effects of prolonging periods of vacancy and blight.  Unfortunately, the extension of the vacancy through extended forbearance and the compounding negative effects on adjoining property values are consequences that legislators should consider before applying a “forbearance for all” approach. 

For example, H.R. 7301, the “Emergency Housing Protections and Relief Act of 2020” provides for a forbearance period of up to one year from the date of its proposed enactment.  Under this proposed legislation, a one-year forbearance is automatically provided in cases where the last borrower in a HECM-financed property has died and an heir simply asks for it.  It is not unreasonable to assume that the request for forbearance would not be made on the first day the property became vacant, but instead, it would be in addition to potentially long periods of vacancy that preceded the COVID-19 pandemic and the remedies society seeks to employ to address hardship. 

Legislators and policymakers should endeavor to find a means to accelerate the resolution of vacant properties by facilitating their recycling back into the housing stock.  Sometimes this means facilitating foreclosure as the most efficient means of reducing negative neighborhood impact, particularly when no residents are harmed in the process.  One of the important lessons from 2008 crisis is that foreclosures may be the best option for preventing the backlog of distressed properties and preserving home equity in moderate income neighborhoods.