NEW YORK – The foreclosure process offers no “good outcome” for any party, Federal Reserve Gov. Daniel Tarullo's said Friday, in urging lenders to offer modifications to borrowers.
Homeowners, he said, have a “perverse set of incentives” where not paying their mortgage will give them a year of free rent in their home, but will eventually move out and have their creditworthiness stained.
“Homeowners who try to get a modification of the terms of their mortgages are all too frequently subject to delay and disappointment,” Tarullo said, according to prepared remarks of a speech to the Washington University Center for Law, Economics and Finance Conference, which were released by the Fed.
“This simply is not a good outcome from any broad perspective -- not for the revival of housing markets, not for the banks and investors that hold the delinquent mortgages, and in the longer run, not even for the homeowners themselves, who will ultimately have to move out, taking with them a dark cloud over their creditworthiness,” he continued.
The social costs of the foreclosure debacle “are huge,” he said. “It just cannot be the case that foreclosure is preferable to modification -- including reductions of principal--for a significant proportion of mortgages where the deadweight costs of foreclosure, including a distressed sale discount, are so high.”
Some banks and lender have worked to increase modifications relative to foreclosures, but he noted “many have not done enough.”
