From HW:

As unpalatable as it sounds, a working paper paper from the National Bureau of Economic Research finds that delaying foreclosures and trying to keep distressed homeowners in their properties is actually worse for local housing economies.

Their proposed solution is to speed up REOs.

The Cambridge, MA thinktank provides the beginning and end dates of U.S. recessions and prides itself on unbiased, economic research. But this will be of little solace to those who will no doubt object to the findings.

Here’s the bomb:

“Our results suggest that the key to minimizing the costs of foreclosure is to minimize the time that properties spend in serious delinquency and in REO. On one hand, this implies putting pressure on lenders to sell properties out of REO quickly,” concludes the paper.

“On the other hand, and perhaps much less palatably, it implies minimizing the time a borrower spends in serious delinquency, which means accelerating the foreclosure process,” they claim.

Researchers Kristopher Gerardi, Eric Rosenblatt, Paul S. Willen and Vincent Yao did their homework on this report. They show that “foreclosure externalities” such as houses sell at lower values, albeit not by much, simply by having neighbors delinquent on the mortgage. But they can’t explain exactly why.

“We discuss three possible explanations for the facts: supply effects, demand effects, and investment externalities, and argue that the third is the most plausible,” they say. “But to be sure, the interactions of all three are so complex that no dataset and no model could likely completely rule out an explanation or precisely allocate the observed correlations to one of the three stories.”

The researchers also point out the right-to-cure law in Massachusetts, passed in 2007, forced lenders to give borrowers an additional 90 days to cure their mortgage before foreclosure proceedings could start. Those borrowers benefited little from such legislation, as qualified homeowners were no more likely to cure the mortgage than other residents of the state.

“One might say that the law only failed to produce benefits, but our analysis suggests that it may also have imposed costs on homeowners who lived near borrowers who were able to take advantage of the law,” they state.

To the general public, the information comes as a total shock. So far, there is no press on it. Perhaps this blog post will change that. More importantly, this will not come as news to HousingWire readers — thus explaining the logic of a blog post and not a more noticeable feature.

Actually, to quote publisher Paul Jackson in March 2010, “Recovery in housing is spelled R-E-O. Anything else is wasting time until we get there.”

 

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