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Foreclosure News | Foreclosure Resources

Foreclosure Moratoriums Reduce Available Credit

Federal Reserve Bank of St. Louis releases analysis

November 4, 2008

By MortgageDaily.com staff


A Federal Reserve economist has issued a report indicating that states which place a moratorium on foreclosures temporarily lower foreclosure rates but force much needed lenders out of their states.

The Federal Reserve Bank of St. Louis today released an analysis authored by economist David C. Wheelock.

He noted that although 2.5 percent of all residential mortgages were in foreclosure as of March 31, the level pales in comparison to around 50 percent on Jan. 1, 1934 -- the height of the Great Depression.

Wheelock said 27 mostly Midwest and Great Plains states instituted a foreclosure moratorium during the Depression. In Midwestern states, farm foreclosures were high and farms were often protected by the foreclosure laws.

"These moratoria and other changes to state mortgage laws enacted during the time favored borrowers over lenders," the report said. "Several states enhanced the rights of borrowers to redeem foreclosed property and limited the rights of lenders to sue for deficiency judgments."

Farm foreclosures subsequently dropped.

But so did available lending, according to Depression era statistics reviewed for the study.

"Foreclosure moratoria tend to encourage lenders to reduce the supply of loans and may lead to higher average interest rates for subsequent borrowers," Wheelock wrote.

He concluded that the benefit of legislation that stops foreclosures should be weighed against the ultimate costs.

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