US foreclosures: Between a rock and hard place

As the mid-term elections in the US took place in early November, the foreclosure crisis gave those running for Senate and other elected positions the perfect weapon to add to their agenda. Several judges looking to be reappointed seized the opportunity by refusing to grant eviction of property owners in foreclosure without the lender offering proof that robo-signers were not used or that documentation had been rechecked. It’s an easy vote winner among an electorate that has seen unemployment increase since the presidential elections two years ago, and that feels the US administration has been apathetic in punishing the banks for the financial crisis.

“I will protect you against the evil banks” is a mantra that is deemed to swing voters who are sitting on the fence.

Such a policy might win votes but the implications are too damaging in the long term for such political pandering to be acceptable. For one, property owners of houses in foreclosure are also less likely to keep up to date in paying property taxes. When a house is foreclosed and taken back by the bank and sold, backdated property taxes get split between the seller and the buyer, and future property taxes will be paid by the new owner. The longer the foreclosure process is delayed, the longer it is until the state receives its property taxes, and the harder it is for states to budget. Property taxes next year are expected to fall for the first time in 25 years, and to continue to fall for at least the next two. With revenues from sales tax and income tax down, that decrease will only add to the burden on state budgets, which for the fiscal year 2010 already faced $190 billion in shortfalls.

The second implication of a lingering foreclosure process is simply that property prices cannot hit a bottom. Until they do, buyers will simply sit on the sidelines and property prices, and therefore property taxes, cannot start to bounce back up. Research from the Centre of Lending Responsibility last year predicted that a staggering $1.9 trillion would be wiped off property values in the US by 2012 purely as a spillover effect from foreclosures. That is because owners of houses in foreclosure are less likely to maintain their properties, and in some cases will abandon them, bringing down values across whole neighbourhoods.

The 50 state attorneys general that are investigating the banks’ mishandling of foreclosure documentation therefore find themselves between a rock and a hard place. Keeping people in their homes for longer periods of time might be a vote winner in the short term but they will be under immense pressure from an economic standpoint to ensure that the investigations do not drag out for too long.