Government Intervention Just Postpones Pain For Foreclosures
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Government intervention in the foreclosure market by giving grace periods seems like a noble effort. Letting homeowners have time to regroup and get control of the situation should be a good thing.
But in reality, and yes we live in a world of reality not wishful thinking, it is a worse treatment for the overall market. Let’s look at the facts, if banks have to worry about government intervention in the marketplace they have to build that into their costs, right? So they raise the rates a little bit to capture that cost that the individual states impose. So who pays the burden, the homeowners.
Then other banks say we can earn a good income not lending in states that have onerous restrictions, so there is a decrease in lending options.
Finally, when the marketplace tries to sort itself out after the government actions have failed to have an impact, you have a much longer downturn because a swift market response was unable to fix the problem.
We talked about this before when Deval Patrick, governor of Massachusetts stopped foreclosures for 90 days. Well the results are in, and sure foreclosures dropped in the 90 day window. But look what happened, they skyrocketed at the end of the moratorium.
Some states have actually frozen foreclosures, but this offers only temporary respite, as Massachusetts recently found out. After imposing a 90-day notification period before foreclosures can be initiated, a quiet summer was followed by foreclosures shooting up 465 percent in September. via CNBC.com.
As we have seen time and time again, when the government intervenes in the marketplace to help the little people, it is the little people (and everyone else) that get screwed.
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Great blog, keep the great content coming! 
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Comment by Jessica Beganski on 14 November 2008:
Another awesomely bad idea by our elected officials. They’ll do anything to avoid telling a constituent “no” or to appear lacking compassion.
Comment by blackfoot on 20 November 2008:
With continuing record foreclosure rates, more people, pundits, and politicians are calling for more direct involvement by the government in the market. Freezing rates, punishing banks, and offering rates as low as 0% to borrowers have been proposed. But holding the banks themselves accountable through government intervention will not serve the overall purpose of convincing banks to begin making prudent lending decisions again. In fact, it was government intervention in lowering interest rates and offering cheap credit that significantly contributed to the real estate bubble to begin with.
Comment by Short Sale on 2 December 2008:
I agree. The flood gates have been opened and it will be some time before they close. The government has to take some action to make it appear as if they can do something, but the truth is that is must run it’s course. Once the housing market makes a rebound I believe the stock market and the economy as a whole are not far behind. It may be some time, but we will have to wait it out.