Some Economists Argue Anti-Foreclosure Laws Backfire

June 27, 2012

State and federal laws that set out to prevent defaulting home owners from being evicted may actually be jeopardizing the housing recovery and even extending the slump, economists told Reuters.

More than 400 foreclosure laws were enacted nationwide last year, according to the National Conference of State Legislature. Many of these laws set out to help struggling home owners modify their loans and stay in their homes. 

But some studies show that the laws may be delaying a full housing recovery from taking hold. A study by Federal Reserve economists measured foreclosure outcomes from 2004 to 2011 for judicial foreclosure states -- where foreclosures must receive court approval -- and “nonjudicial” states, where foreclosures do not have to go through the courts. 

The researchers found that judicial states “indiscriminately” slowed the foreclosure process and there appeared to be no benefits to the home owner or housing market from slowing the process. What’s more, the economists said that foreclosure protection laws also could lead to an increase in blight in neighborhoods, as delinquent home owners had less incentive to keep up their homes. 

Prolonging the foreclosure process also seemed to scare off some potential buyers because it raised concerns on how “clean the title to a property was,” Lauren Lambie-Hanson, one of the economist researchers, told Reuters. 

Lawmakers continue to debate how best to cure the foreclosure crisis and help the housing market. The Obama administration has argued that home owners struggling with their mortgages should have more time to renegotiate the terms of their loans so they can stay in their homes. Others have argued that delays in the foreclosure process creates a backlog of delinquent properties and stalls a recovery to home prices in communities. 

Source: “Insight: Evidence Suggests Anti-Foreclosure Laws may Backfire,” Reuters (June 27, 2012)

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