Legal Commentary

Third Way Memo Opposing Mortgage Foreclosure Moratorium:

By Todd Zywicki

Third Way, which I take to be a centrist Democratic think tank, has just released a memo opposing a foreclosure moratorium.  It is here.  They make a key point that others have overlooked, both in this context and in the foreclosure amelioration context more generally:

While the fact of so many underwater borrowers is a drag on the overall economy, these borrowers also present a specific threat: they are the most likely to walk away (i.e., ?strategically default?). By doing so, they would cause home values to fall even further, which in turn would put yet more borrowers at risk of going underwater as well. To stop this vicious spiral, policymakers must encourage underwater borrowers both to stay in their homes and stay current on their mortgages.

A foreclosure moratorium, however, would have the opposite effect by essentially eliminating the penalties of a default. If a homeowner is underwater, why not stop paying the mortgage if they can?t be forced to leave the house?

Full post as published by The Volokh Conspiracy on October 20, 2010 (boomark / email).