Government has failed to solve Nevada’s housing problems
Ronald Reagan once quipped that the nine most terrifying words in the English language are, “I’m from the government and I’m here to help.”
In no other area over the last five years has Nevada government tried to be of more “help” than in its attempts to deal with Nevada’s housing problems. But just as President Reagan and his audiences recognized, such “help” regularly makes things worse.
In this instance, the politicians have only postponed the recovery in Nevada’s housing market.
The state legislature’s latest attempt to mitigate the effects of the inevitable bursting of the housing bubble is Senate Bill 321, the so-called “Homeowner’s Bill of Rights.” Sponsored by Sen. Justin Jones, it took effect earlier this month.
SB 321 is Carson City’s third attempt to “help” borrowers facing foreclosure, and, like the others, it imposed several new requirements on banks that will lengthen the foreclosure process.
This new attempt follows the constitutionally conflicted Foreclosure Mediation Program instituted in 2009 and 2011’s passage of AB 284. That bill made foreclosure paperwork errors a category C felony. Even lawmakers belatedly realized that with AB 284 they’d produced a number of negative consequences, and so, earlier this year, they modified the law during the 2013 session.
Unfortunately, each of these laws has only prolonged the misery in Nevada’s housing sector.
Unsurprisingly, lenders rushed through as many notice-of-default filings as possible before SB 321 took effect Oct. 1. The Las Vegas Review-Journal reported that on the last two business days before SB 321 kicked in, 1,374 notices of default were filed in Clark County, compared to 1,149 in the entire month of August. In total, 3,761 NODs were filed in September, the highest number since just before AB 284 took effect in October 2011.
On the first two days after SB 321 went into effect, however, just 32 Clark County default notices were filed.
These government-imposed delays, however, do not genuinely help the delinquent mortgage holders. Economists have found similar laws actually decrease the likelihood a borrower will “cure” his or her mortgage problems.
In November 2011, three Federal Reserve economists examined a Massachusetts law that stopped the clock on foreclosures for 90 days in an attempt to help borrowers catch up on their payments or obtain a mortgage modification.
The economists found that:
[T]he right-to-cure policy that Massachusetts implemented in 2008 had no impact on borrowers’ ability to cure their mortgage defaults or obtain mortgage modifications. In fact, in some specifications, there is a small and marginally significant decline in cure probabilities at the earliest stage examined, three months after the borrower became seriously delinquent.
The economists found that one reason for this is “that lenders already do exactly what the lawmakers want them to do … In other words, borrowers who stand to benefit the most from additional time already get it.” (Emphasis added.)
What laws like Massachusetts’ 90-day delay or Nevada’s SB 321, AB 284 and Foreclosure Mediation Program have done is simply drag out the foreclosure process — and the needed recovery.
Local corroboration is available in a Reuters interview with Malik Ahmad, a Las Vegas foreclosure defense lawyer. His view on Nevada’s housing problems and the solutions needed completely changed after AB 284, reports Reuters.
“This law has become a mockery,” Ahmad said. “I am now turning down clients every day who I know have no intention of ever trying to pay their mortgage. They just want to stay in their homes for free. And that is a bad situation for everyone, lenders and homeowners.”
The Federal Reserve economists also found that delaying foreclosure has broader negative consequences for the housing market as a whole:
At the crudest level, delaying the foreclosure process causes a wealth transfer from lender to borrower. The borrower lives rent-free while the lender loses interest income from the capital in the property and cannot get reimbursed for the depreciation. But there are other potential effects for the community as a whole. …
The unambiguous effect of delaying foreclosure is that it lengthens the period for separation of ownership and control of residential property. As prominent housing economist Edward Glaeser writes:
Delinquent homeowners want to inhabit and to control their homes. Lenders want to get them out and to limit the damage done to the property. During the foreclosure process, home occupants have no reason to invest in their homes. Indeed, spite sometimes pushes them to abuse the property. [This] logic suggests that such periods ensure an abuse of the housing stock, which is one reason why homes often lose close to half of their value when they go through foreclosure.
These devalued and sometimes abandoned homes have negative impacts on entire neighborhoods.
A Temple University study found that abandoned houses in Philadelphia lowered property values for every home on the block by $6,715. Borrowers in default not only decrease their neighbors’ property values, they also are unlikely to pay their property taxes, which decreases revenues for local governments and schools.
Keeping houses in the hands of delinquent borrowers also limits the opportunities of both young adults just entering the market and also those wise enough not to buy a house at the housing bubble’s height.
Another problem with SB 321 is that — like AB 284, before it — the law is poorly written. Housing experts can’t agree on the real meaning of a key provision regarding arm’s length agreements, which usually prevent a mortgage holder from short-selling the residence to a family member or friend for a less-than-market value.
Housing experts interviewed by Vegas Inc predict that the interpretation of that provision of the law will go to court, and a ruling will either lead to a class-action lawsuit against banks or lawsuits from lenders alleging that sellers colluded with family or friends.
State lawmakers keep attempting to “solve” Nevada’s housing-market crisis by prolonging it. Session after session, their legislation rewards the devious and penalizes responsible homeowners.
That is terrifying help indeed.
Victor Joecks is communications director at the Nevada Policy Research Institute. For more visit http://npri.org.