The United States faces a foreclosure crisis. The Mortgage Bankers Association reported that slightly more than four percent of the loans in the United States are in the foreclosure process as of the third quarter of 2010. RealtyTrac reported in January 2011 that nearly three million homes received foreclosure filings in 2010. In addition to the current foreclosures, there exist a substantial number of potential foreclosures that will occur in the next several years. Goodman (2010) estimates that there may be another seven million homes that will face foreclosure. CoreLogic estimated that nearly 23 percent of all mortgages are underwater as of the third quarter of 2010. This number spikes in the areas hardest hit by the mortgage crisis. The sheer volume of actual and pending foreclosures coupled with a slowdown in the foreclosure process to due legal and political wrangling has increased the time that a home is in foreclosure.
The purpose of this policy briefing is to analyze the economics of delaying the resolution of the foreclosure process. We review the literature relating to the macroeconomic effects of delaying foreclosures. We begin by identifying four types of potential costs of delay. We then present the empirical evidence in support of delaying foreclosure and review current attempts to slow foreclosure through government action. Although there is likely a material price effect from foreclosure and some associated consumption-wealth effect, these are short-term effects that are likely to dissipate over time. If homeowners believe that home prices will rebound in the long term, then long-term consumption-wealth effects are likely to be small. In contrast, foreclosure mitigation strategies can have adverse long-term effects on consumption and investment. Given where we are in the business cycle, the price effects of foreclosure have likely run their course; at the margin, there is little to be spared by delaying foreclosures further. Because the social benefit of delaying foreclosure further is likely to be second-order in magnitude, the net benefits of delay are likely negative. What the housing market needs now is certainty, which will invigorate investment and consumption.