Last week, two Federal Reserve Governors made speeches in which they weighed in on the ongoing foreclosure epidemic. Their remarks, while not exactly breaking any new ground, or offering any new solutions, were fairly interesting, straight forward statements from members of a group that is known for opaque speech. Let’s jump right in:
On Friday, Federal Reserve Governor Daniel Tarullo spoke at a conference on financial reform at George Washington University. He (mildly) rebuked some banks for not doing enough to stem foreclosures:
“It just cannot be the case that foreclosure is preferable to modification — including reductions of principal–for a significant proportion of mortgages where the deadweight costs of foreclosure, including a distressed sale discount, are so high. While some banks and other industry participants have stepped forward to increase the rate of modifications relative to foreclosures, many have not done enough”.
I couldn’t agree with Tarullo more. We have set up a backward system that rewards behavior it should deter, and deters behavior we should reward. Another Federal Reserve Governor, Sarah Bloom Raskin addressed foreclosure related issues at the National Consumer Law Center’s Consumer Rights Litigation Conference in Boston. Raskin does not paint a pretty picture:
“Our projections remain very grim for the foreseeable future: All told, we expect about two and one-quarter million foreclosure filings this year and again next year, and about two million more in 2012. While these numbers are down from their peak in 2009, they remain extremely high by historical standards and represent a trauma in the lives of millions of people affected”.
In my opinion, Raskin’s next statement is the key to the whole foreclosure crisis:
“As it turns out, the structural incentives that influence servicer actions, especially when they are servicing loans for a third party, now run counter to the interests of homeowners and investors”.
This is it in a nutshell. We have set up a system that incentivizes foreclosure over modification. The question remains: what can be done about it?
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