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Summary

On July 26, 2008, Congress passed legislation creating a voluntary program to enable troubled mortgage borrowers and lenders to refinance their loans through the Federal Housing Administration (FHA). Having created the voluntary program, it remains to be seen if people will be willing and able to participate under current financial market conditions. Meanwhile, the pace of foreclosures continues to rise, even as another category of loans, Alt-A, approaches the peak of its payment resets. The foreclosure process may be costly and cumbersome. Some have argued for a moratorium on foreclosures to give distressed borrowers and lenders time to seek financial relief. Others might argue that delaying foreclosures may also delay the recapitalization of the banking system and ultimately delay restoration of stability in financial markets. Proponents might counter that providing additional time to keep current borrowers in their homes will ultimately reduce the magnitude of bank losses and lessen the need for recapitalization. The persistence of large unsold inventories of housing may be an indicator that house prices may fall further. Further declines in house prices might contribute to more foreclosures and more instability in financial markets. Although economists generally believe that prices adjust to clear shortages and surpluses, it could be argued that the housing market has characteristics that make that process longer and more painful than in some other consumer goods markets. In housing markets, several factors may contribute to a feedback loop (where housing market instability becomes self-reinforcing). Potential obstructions to price adjustment and market clearing in the housing market include builders hesitating to lower prices for new houses because they may have duties to previous customers; the reluctance or inability of some homeowners to sell their houses for less than they owe on their current mortgages; the addition of foreclosures to housing supply when prices fall; the tendency of some potential buyers to wait for market prices to hit bottom; and the reduction of available mortgage credit during a housing market downturn. A moratorium would have costs and benefits. On the benefit side, it would provide all market participants with more time to assess asset prices and evaluate alternatives. On the cost side, it could delay the ability of markets to clear excess inventories and restore financial stability. Evidence from the Great Depression suggests that states that enacted moratoriums provided relief to some home owners but saw higher costs of credit and fewer loans compared with states that did not. It nevertheless has been argued that natural disasters are an appropriate analogy and that the oncoming schedule of Alt-A mortgage resets creates time pressure that, in the absence of a moratorium, could overwhelm the capacity of loan servicers. A regulatory foreclosure freeze has been announced by the FDIC for IndyMac loans. Some have called for a foreclosure freeze for loans held by the GSEs in conservatorship. In Congress, H.R. 6076 would set up a deferment period during which home owners would make a payment calculated by formula. This report will be updated as conditions warrant.

Related Legislation:
• H.R.6076

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