Past results suggest today’s foreclosure moratoria are an appropriate response to the pandemic, according to a new study from the Ziman Center for Real Estate at the University of California.
The foreclosure moratoria allowed under the CARES Act have benefitted homeowners and the overall economy and has left little or no negative impact, according to Stuart A. Gabriel, Director of the Ziman Center for Real Estate at the University of California, Los Angeles. He explained the benefits of the foreclosure moratoria, citing past evidence from the 2008 financial crisis, in an economic letter entitled “Foreclosure and Eviction Moratoria: Just Do It.”
The foreclosure moratoria allowed under the CARES Act helped reinforce “shelter-in-place” orders this spring as governments worked to stem the spread of the coronavirus. The moratoria also helped prevent neighborhoods from the negative impacts foreclosure can bring, such as urban blight.
“Large-scale eviction and home foreclosure in the wake of the COVID-19 pandemic likely would have been detrimental to virus spread, homelessness, and other health and social outcomes,” Gabriel wrote. “Such policies would also have been the wrong prescription for the broader economy. Evidence from our recent study suggests that the recent COVID 19-related moratoria on residential foreclosure and eviction ultimately will reduce the economic costs of the current crisis and will hasten an economic recovery as the virus abates.”
Gabriel wrote that his positive view of foreclosure moratoria is “evidence-based,” rooted in outcomes from the financial crisis of 2008 when California enacted foreclosure moratoria and increased lender foreclosure costs as the financial crisis brought nearly 800,000 to the brink of foreclosure.
California created policies to encourage mortgage modifications and the maintenance of foreclosed homes to prevent neighborhood blight and the inevitable damage it does to home prices in the surrounding area.
The UCLA research estimates California state laws were responsible for preventing 250,000 foreclosures, keeping home prices 6% higher than they would have been otherwise, and improving home equity by $350 billion across the state.
Furthermore, “we find that the policies did not create any adverse side effects for new California borrowers as regards credit rationing,” Gabriel wrote.
Thus, Gabriel strongly supports the foreclosure moratoria put in place during the COVID-19 pandemic. The policy “provided immediate relief in the wake of widespread job loss” and ultimately will “mitigate the severity of the current economic downturn,” according to Gabriel.
However, the moratoria in place may not be enough. The moratoria should be partnered with mortgage interest rate modifications in order to lower monthly payments for borrowers, Gabriel suggested. He also recommends that relief should be extended to multifamily rental investment properties.
The economic letter was released in advance of a more extensive research paper titled, “A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession.”