Mortgage Foreclosure Moratorium Might Not Be Best Move Federal Reserve Report Finds

November 6, 2008 12:40 p.m. EST

St. Louis, MO (AHN) - A report by the Federal Reserve Bank of St. Louis warns against a moratorium on mortgage foreclosure, citing the low number of mortgages now in foreclosure along with lessons learned from a similar measure during the Great Depression.

About 1 percent of U.S. home mortgages entered foreclosure during the first quarter of 2008 and at the end of the quarter some 2.5 percent of all home mortgages were in foreclosure compared to half of all urban home mortgages in foreclosure during the Great Depression, along with a high percentage of farm mortgages.

An analysis by an David Wheelock, an economist with the St. Louis Fed shows that 27 states enacted laws that created moratoriums on foreclosures during the Great Depression. But those moratoriums had the unintended consequence of reducing the supply of loans banks subsequently made, as well as causing interest rates on new loans to rise, Wheelock found.

"The evidence from the use of foreclosure moratoria during the Great Depression demonstrates how legislative actions to reduce foreclosures can impose costs that should be weighed against potential benefits," Wheelock said in a statement.

In addition to Wheelock's findings, the nation still has an oversupply of housing, which should bring a continued downward pressure on housing prices.

According to U.S. Census Bureau figures, the nation has about 24 million more housing units than there are households in the nation to occupy them. Selling all those surplus housing units would mean either a great many Americans buying second or third homes or foreign buyers purchasing them.

The subprime mortgage crisis began when a previous overstock of housing units caused real estate and financial services businesses to become creative in granting huge mortgages to people without adequate income to pay back those loans in order to sell houses at high prices, because there weren't enough income-qualified buyers to purchase the surplus housing stock then.