Experts: The Market Needs Faster Foreclosures

NEW YORK (MainStreet) — The key to stabilizing U.S. home prices is to do the opposite of what’s happening now, says one housing industry expert. Instead of sitting on hundreds of thousands of foreclosures, banks and lenders should be accelerating the process of foreclosure and eviction.

Foreclosure activity has abated somewhat. According to housing data monitor RealtyTrac, there were 219,258 new foreclosures in May, down 1.98% from April. But a Kansas State University business professor says that we actually need more foreclosures, or at least foreclosures moving at a faster pace, to help mend the ailing U.S. housing market.

The professor, Eric Higgins, released a new study in conjunction with Columbia University and Louisiana State University that says delaying or prolonging the foreclosure process actually hurts the housing sector, as it “prevents the market from recovering.”

That’s not to say foreclosure is a good thing, Higgins says. It’s just that like a cold or flu, it’s best to take your medicine and try to get better as soon as possible.

"In no way do our studies suggest that foreclosure is a good thing," said Higgins, head of the department of finance at Kansas State. "It is very unfortunate, but to delay the foreclosure process doesn't help anybody. It doesn't help the homeowner who is in debt and can't get out of debt. It's not helping the economy because we can't find the bottom of the housing market. And it's not helping neighborhoods because you have neglected houses."

Banks deserve some of the blame for the slow pace of foreclosures, he adds. The robo-signing debacle of late 2010 clearly rests on the lending industry’s shoulders. Shoddy mortgage documentation processes slowed the foreclosure market down and just staved off the inevitable, Higgins says. That has kept the housing market from doing what it needs to do: hit bottom.

"The reason it appears to be a double dip is because foreclosures stopped due to the uproar over robo-signing practices," Higgins adds. "So, what we were seeing for home prices at that time wasn't really a true price. Once a true regulatory settlement was reached with mortgage servicers, the foreclosure process began again, the inventory of houses increased and prices dropped."

It’s all about home values, Higgins says. It takes 17 months, on average, for a home foreclosure to be processed. In that time, neighboring homes suffer from their proximity to the foreclosed residency, bringing entire neighborhoods into decline, from a home value perspective. Kicking the can down the road on foreclosures just compounds that problem.

"By delaying foreclosures and modifying mortgages, all you are doing is prolonging the borrower's problems," Higgins said. "Statistics show that mortgage modifications don't really work and people are eventually going to be in a situation where they are unable to pay the adjusted mortgages. It gives borrowers who are in trouble a sense of a false hope and encourages other borrowers to engage in strategic default."

Higgins also notes a link between foreclosures and unemployment. It’s not as much an issue of available jobs, it’s a matter of job mobility, he says.

"People are stuck in these houses that either have been foreclosed or will be foreclosed, or they are so underwater that they can't sell the house," Higgins said. "So there may be jobs out there, but folks can't get to them because they are stuck in bad mortgages, and that keeps the unemployment rate higher."

When foreclosures do accelerate, they’ll clear that much faster, Higgins says. Then--and only then--can the housing market really recover.

"A lot of pain is going to happen, but the market needs to clear," Higgins said. "Once it clears, new construction can start. When construction starts, we create jobs in that area and then things might be able to pick back up."

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