Living After Foreclosure

There’s legislation ongoing in Albany, NY, that will allow judges to postpone foreclosure proceeding and modify interest rates on mortgage notes of subprime borrowers. The Wall Street Journal contends in an editorial that this is “pols … taking a whack at bank balance sheets” by giving judges the authority to put off foreclosure proceedings for up to a year and lower the interest rate on the note.  Then, this may be repeated: the proceedings can be stopped for up to three more years.

The piece also suggests that this undermines the value of mortgage-backed securities, and raises the costs to new borrowers since banks can be made to hold onto non-performing assets.

Forcing the banks to keep the notes and accept lower rates of return doesn’t seem really to be the worst that could happen to these banks, though.  It’s rarely a good time for banks to foreclose, but now it’s especially bad.  These homes will be vacant and will be thrown onto a market that already has too much inventory.  It seems much better instead to hold onto the notes for up to four more years, get some more payments from the homeowner who now has some more hope that things will turn around, post any late fees that the homeowner might have incurred and might continue to incur, sit out the slump (which may turn around in the meantime) and then be able to foreclose in more of a seller’s market.

In short, this legislation helps the banks more than it hurts them, if for no other reason than the legislation’s timing.

What do you think? Am I missing something big?

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