Are We Overreacting To the Foreclosure Freeze?

Do a search on Google News for “Bank of America,” and you will see hundreds of news stories about their foreclosure freeze. Bank of America recently announced they are halting foreclosures nationwide, pending a review of their foreclosure procedures.

GMAC Mortgage and JPMorgan Chase have previously implemented a freeze in the 23 states where foreclosures are controlled by the courts (so-called “judicial foreclosure” states). But Bank of America is going further by freezing foreclosure in all 50 states.

Wells Fargo recently said they are planning to move forward with all legitimate foreclosures, despite one of their former employees making similar claims about “robo-signing” documents.

All of this comes in the wake of whistleblower testimonies and governmental scrutiny regarding foreclosure procedures. Some former employees of Bank of America (and other lenders) have said that they signed off on dozens or hundreds of foreclosure documents a day, without much scrutiny or verification.

But it’s the Bank of America foreclosure freeze that really has the media in a tizzy. I even saw one headline that said Bank of America’s foreclosure freeze could cause another housing crisis.

Which begs the question … aren’t we overreacting a bit?

Here’s the logic behind the doom-and-gloom headlines. Halting foreclosures will prolong the high level of foreclosure homes we have right now. This in turn will delay recovery and stability in the housing market. It will also prevent home prices from normalizing.

But let’s look at this from a different angle. It’s in the best interest of these banks to perform their internal reviews as quickly as possible. After all, those foreclosure homes are non-performing assets. They lose more money the longer they hang onto them. So you can bet that whatever actions they take will be swift.

Bank of America CEO Brian Moynihan recently downplayed the events: “We haven’t found any foreclosure problems,” he said. “What we’re trying to do is clear the air and say we’ll go back and check our work one more time.”

Many people claim that a temporary foreclosure freeze will drive home prices down. “The moratoriums … can be incredibly destructive to the fragile recovery of the housing and housing finance markets,” said Anthony Sanders, a finance professor at George Mason University. “Consumers looking to get back into housing are even more fearful than before. This can lead to further house price declines.”

There are plenty of folks in the media who echo Mr. Sanders sentiments.

Declining home prices. What’s wrong with that? Home prices are still inflated in many parts of the country. They still need to come down to more realistic levels, if we’re ever going to see the market pick up.

But let’s get back to the drama at hand. Many in the media are blowing this whole thing out of proportion: Foreclosures have been halted. The market will come to a screeching halt. Home prices will plummet. We may see another housing crisis. This might trigger a double-dip recession. So on and so forth.

Here’s my prediction. A month or two from now, no one will even remember the Bank of America foreclosure freeze. It will be business as usual in the world of home foreclosures, auctions, and resales. And then we can go back to worrying about larger concerns. Like unemployment.