How Will a Foreclosure Freeze Affect the Housing Market?

We previously wrote that the current foreclosure freeze was being blown out of proportion. But could there be more to the story? After delving deeper into the morass, I’ve revised my position.

Here’s what I think. The foreclosure freeze itself will mostly have a short-term effect on our housing market. It will initially reduce the inventory of foreclosure homes. But when the banks start rolling at full speed again, it will increase the inventory and therefore depress home values. It’s what lies beneath that has people more concerned, and it could have a broader impact on the housing market.

The foreclosure freeze is only a symptom. The rubber-stamped paperwork and convoluted transfer of mortgage notes is the disease. And the disease could have a serious impact on our housing market. Or, it could become water under the bridge in no time at all. It all depends on how it’s handled. And this is exactly why so many people are divided on how the foreclosure freeze (and underlying mess) will affect the housing market as a whole.

To give you a broader sense of what’s going on, I’ve created an ongoing list of foreclosure freeze analysis and predictions. I call it the Predict-o-Meter:

The Foreclosure Freeze Predict-o-Meter

Here’s how it works. I set up some Google Alerts to tell me whenever somebody online is talking about the foreclosure freeze and the housing market. Blog posts, news stories, press releases, random bits and pieces of online commentary — it all comes to my inbox courtesy of Google’s web-crawling technology. And then it winds up on this page.

Note: This is an organic story that is still unfolding. This page will be updated continuously.

  • freddie macFreddie Mac released its third-quarter financial report at the beginning of November. Among other things, CEO Charles Haldeman said the recent foreclosure freeze would push housing recovery further down the road. “[T]he housing market remains fragile and has recently come under renewed pressure from slowing economic growth, weaker employment and foreclosure uncertainties,” he said. “We believe that it will be a considerable time until the housing market has a sustained recovery.” November 3, 2010, Freddie Mac
  • Wall Street JournalOn the Wall Street Journal website, Ruth Simon mentioned that “Some experts predict that the only way out of the [foreclosure robo-signing] debacle is a huge settlement in which home-loan servicers modify the terms of billions of dollars of mortgages.” Of course, this kind of settlement would be a serious financial blow to the banks. And that would hamper their ability to make new loans to home buyers. October 23, 2010, Wall Street Journal
  • ReutersA Reuters article recently quoted an economist named Patrick Newport from IHS Global Insights. He pointed out that the fear caused by the foreclosure freeze has negative implications for both the housing market and the broader economy. To quote the article: “Fewer sales to investors means fewer sales altogether, which will further elevate supply. That, in turn, will keep a lid on home prices, making consumers feel poorer.” October 22, 2010, Reuters
  • Washington PostBrady Dennis of the Washington Post points to the “moral hazard” associated with the foreclosure freeze. He said there are no statistics to show how many homeowners are using the foreclosure moratorium to skip out on making their payments. But some “economists warn that this practice could become more common if a national [mandatory] freeze is put in place, as some lawmakers are trying to do.” –October 20, 2010, Washington Post
  • Wall Street Journal“A national foreclosure moratorium will exacerbate the housing-market crisis,” said Barbara Novick, “by increasing uncertainty and preventing supply and demand from reaching equilibrium.” Her Wall Street Journal article points out that a backlog of foreclosures will prevent the housing market from righting itself, dragging home prices even lower. October 18, 2010, Wall Street Journal
  • HUDShaun Donovan, secretary of the Department of Housing and Urban Development (HUD), mentioned the damage a foreclosure freeze could do to our housing market. He made the following comments in an article on the Huffington Post. “We’ve seen real progress in the housing market … With vacant and abandoned homes more than three times as destructive to the values of neighboring homes as occupied homes that are just beginning the foreclosure process, a blanket moratorium would only slow down that progress.” –October 17, Huffington Post

We will bring you more news about the foreclosure freeze and housing market as the situation unfolds.