Foreclosure Freeze Will Not Warm Up the Housing Market

Maybe it was the stern talking to they took from Congress this past week that put the big banks into a charitable mood. J.P. Morgan Chase, Citigroup and Bank of America have all agreed to freeze foreclosures while the Obama administration works out plans to help bolster the floundering housing market.

As noted in a recent article in The Wall Street Journal, "We will not add to the foreclosure process any new owner-occupied residential loans that are owned and serviced by J.P. Morgan Chase," the company's chief executive, Jamie Dimon, said in a letter Thursday to Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee.

The moratorium on new foreclosure proceedings will last until early March, with the hope that this will give adequate time for Treasury Secretary Timothy Geithner to put his 50 billion foreclosure prevention plan in place. Geithner hinted at plans last week to stem the flow of home losses that has washed over the whole country. President Obama has also said he will outline the actions his administration plans to take on the foreclosure mess next week.

All three banks' plans apply to primary residences and they seemed willing only to do this in the short term. According to The Wall Street Journal, some lawmakers have suggested Treasury Secretary Geithner "strongly encourage" banks receiving government bailout funds to temporarily stop foreclosures. "TARP-assisted financial institutions should allow struggling homeowners more time to qualify for any systematic loan modification plan," Frank and Rep. Doris Matsui (D., Calif.), wrote in a letter to Mr. Geithner Wednesday. J.P. Morgan Chase, Citigroup and Bank of America have each received billions in TARP funds.

Government controlled mortgage finance companies Fannie Mae and Freddie Mac have also agreed to immediately suspend foreclosure sales on owner-occupied homes. While these freezes in the foreclosure action may give some homeowners a little breathing room, it probably does not offer any long term help.

The real problem is the "underwater mortgages," or the mortgages on homes that are worth less than an owner owes. Even with banks offering lower interest rates or assistance with payment plans, there seems little incentive for some homeowners to keep paying on a home that is not accruing any equity. The stigma of a foreclosed home does not hold the same sting it once did and families are finding it easier to hand in the keys and walk away.

The root of the problem isn't the foreclosures; that's just the unpleasant side effect. The real problem was the over-valuation of homes that swept the country for the first part of this decade. This was particularly true in places like California and Florida where building booms have led to an unprecedented housing bust. The ripple effect is that all houses have lower value as sellers compete in a housing market along side foreclosed properties.

Foreclosure freezes are helpful, as are lower interest rates and bank assistance with payment plans. However, until home values stop plummeting, the housing market and the economy are not going to recover anytime soon.

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