Reuters article details how anti-foreclosure laws are extending Nevada’s housing slump

Victor Joecks

Liberals love to claim that the free market hasn’t fixed Nevada’s housing crisis, but as this Reuters article shows in devastating detail, government is to blame. Government has not only failed to fix the housing crisis, but its interfering with the marketplace has worsened Nevada’s foreclosure problems.

State and federal laws enacted to protect homeowners from eviction in the wake of the 2008 housing crash may be extending the slump, according to a growing number of economists and industry experts.

Foreclosures have all but ground to a halt in Nevada, which passed one of the stiffest borrower-protection laws in the country last year. Yet the housing market is further than ever from recovery, local real estate agents say, with a lack of inventory feeding a “mini-bubble” in prices that few believe is sustainable.

A recent U.S. Federal Reserve study found that in states requiring a judicial review for foreclosure, delays associated with the process had no measurable long-term benefits and often prolonged the problems with the housing market.

Data from housing market researchers points to similar conclusions.

“Many state laws that stretch out the period for legitimate foreclosures result in no added benefit for the homeowner and produce harm to the housing finance system and to neighborhoods,” said Alfred Pollard, general counsel to the Federal Housing Finance Agency, at a House of Representatives oversight hearing in March. …

According to the National Conference of State Legislatures, a bipartisan organization serving the legislators of all 50 states, more than 400 foreclosure laws were enacted across the United States in 2011 alone, and most slowed down the process.

The Nevada law, passed during the legislative session and then implemented in October, may be the most stringent: It imposes criminal penalties on lenders that try to foreclose without the proper paperwork. That has led to a dramatic drop in foreclosures in a state that was among the hardest-hit by the housing crash.

In September, banks filed nearly 5,000 foreclosure notices in Nevada. By February, just 460 were served, according to online foreclosure property marketplace RealtyTrac.

Ricky Beach, a real estate agent in Reno, Nevada, said the new law, AB 284, “has pretty much killed the market here.” The lack of foreclosure activity has led to a dearth of inventory, he said, with the number of homes for sale in the area down to 778 today from more than 1,700 in September.

This has triggered a “mini-bubble” in housing prices because the few properties available are receiving multiple bids. The only problem: No one thinks the gains are sustainable.

“The bill did nothing to solve the crisis – it’s just prolonged it,” Beach said. “Sooner or later the banks will work out how to deal with the law. And then foreclosures will hit the market, and prices will crash back down.”

Malik Ahmad, a Las Vegas foreclosure defense lawyer who has spent the last six years trying to help vulnerable borrowers deal with unscrupulous banks, said the law had completely changed his view of the nature of the crisis.

“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.”

This article needs to be read in full, especially by every legislator who supported AB 284, which has harmed responsible homeowners and deepened Nevada’s housing problems.

So what should politicians at the state and federal level do? Let the market work. As I wrote two years ago:

What do our politicians need to do? The same thing they needed to do 16 months ago [written in June 2010]. Let the economy retract in the short term in order for individuals to move assets from low-value industries to more productive sectors of the economy.

During recessions, in a free-market system, the economy moves money and jobs from low-performing areas to higher-performing ones. And when I say “the economy,” I mean millions of individuals acting in their own self-interest. The economy isn’t a giant organism that has a mind of its own.

This reset is necessary and healthy, because resources (natural resources, products and people) are scarce. Keeping limited resources in low-value sectors of the economy and not allowing them to move to high-value sectors limits economic growth.

To use an analogy, it’s like pruning a tree. In the short term, the tree is smaller, because you’ve cut back in some areas. But those cut backs are necessary to stimulate growth in the long term. Without those cuts, the tree won’t grow as large and may even die.

Let’s also use automobiles as a historical example. Before cars, people still needed transportation. They just used horses and buggies. As cars replaced the horse and buggy, the horse and buggy manufactures were hurt. Consumers no longer needed their product (at least not on such a large scale). Employees lost jobs. Large businesses closed or were forced to retool. This is the kind of economic reordering that happens every day in the free market. And for consumers, it’s good that this happens.

Unfortunately, the government often prevents the necessary corrections from happening.

Nevada’s tried government solutions for its housing problems. Government has failed. The answer is the market, not more government interference.