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June 23, 2011

Report Reveals Why Foreclosure Delay Prolongs the Housing Market Slump


Editor’s note: Funding for this research was provided in part by the financial services industry, including entities affected by the proposed settlement. The views expressed here are those of the authors, and do not represent the views of the associated institutions.

NEW YORK—June 23, 2011—A report coauthored by Columbia Business School’s Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Finance and Economics; Kansas State Finance Professor Eric Higgins; and Joseph Mason, finance professor at Louisiana State University, finds that the most appropriate way to help the housing market is to stop delaying foreclosures. The authors’ perspective is in response to a recent settlement proposed by a consortium of state attorney generals (AGs) to large mortgage services.

The authors posit that mandated, across–the–board mortgage modifications are not suitable for resolving most of today’s delinquent mortgages, and provide research that supports their belief. ‘The Economics of the Proposed Mortgage Servicer Settlement’ paper discusses why the quick resolution of the mortgage crisis and the recovery of the economy may be more sensibly based upon policies that encourage the speedy recognition of losses to all of those involved in the marketplace, while also addressing illegal behavior directly (including robo–signing violations and other shortcomings of the industry) where it took place, instead of relying on mortgage modification.

According to their research, foreclosures take an average of 17 months to process — and during that time, the home can decline in value. The paper discusses why the delay of foreclosures and the modification of mortgages simply prolong the borrowers’ problems. When foreclosures are delayed, homeowners cannot get out of debt, neighborhoods depreciate in value due to neglected houses, and it is extremely difficult for economists and policymakers to determine the actual bottom of the housing market.

 

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