Federal Reserve governor Daniel Tarullo said Friday that the foreclosure process offers no “good outcome” for any party and urged 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, but will eventually lead to expulsion and poor credit.
“Homeowners who try to get a modification of the terms of their mortgages are all too frequently subject to delay and disappointment,” Tarullo said in remarks prepared for a speech to the Washington University Center for Law, Economics, and Finance Conference. “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 home-owners themselves, who will ultimately have to move out, taking with them a dark cloud over their creditworthiness.”
The social costs of the foreclosure debacle are huge, according to Tarullo.
“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,” Tarullo said.
