An interesting example of the verity that no good deed goes unpunished. JP Morgan has pointed out that precisely and exactly because foreclosure on a defaulted mortgage is more difficult these days therefore they are lending less on such mortgages. This is, of course, something of a pity as one of the great strengths of the US economy has always been the speed with which economic mistakes get cleaned up. Whether bankruptcies (corporate or personal), foreclosures, loan defaults and so on, the system has always, until now at least, been very swift in cleaning them up. So that economic assets can be moved on to someone who can make better use of them.
Here’s the point that JP Morgan is making:
JPMorgan Chase JPM +0.86% & Co, the second-largest U.S. mortgage lender, is backing away from making home loans to less creditworthy borrowers after losing faith in its ability to recover much money from foreclosing on homes, even with government guarantees.
We could, of course, say that this is a good idea. They’re now not looking just to equity value of the home itself, nor to the various government guarantees, but also taking a closer look at the credit worthiness of the borrowers themselves. But there’s a little more detail as well:
“The cost to take a customer through the foreclosure process is just astronomical now,” Kevin Watters, chief executive of JPMorgan Chase’s Chase’s residential mortgage banking business in New York, told Reuters in an interview.
In addition to federal standards, states, and in some cases local governments, have written their own rules making it more expensive for banks to recover loan losses, he said. According to foreclosure data firm RealtyTrac, it took an average of 120 days to foreclose on a home at the beginning of 2007, just as the housing bubble was starting to burst. In the first quarter of 2014, it took 572 days, or more than 1.5 years.
In any economic system there will be those who make mistakes. And sure, it’s great that the system starts to analyse those who are likely to make such mistakes a little more. But on the other side it’s also true that the speed with which such mistakes are cleaned up is important. There’s nothing worse for an economy in general than having useful economic assets sitting unused simply because the bankruptcy (or foreclosure, whatever) process takes too long to come to some sort of resolution. We do, of course, want to be fair to people who get themselves into financial trouble. We also would prefer not to be turfing families out into the streets. But at the system level it is also hugely important that such mistakes be resolved, and resolved quickly. One of the reasons for the vibrancy of the US economy is that bankruptcy is both easy and not all that big of a deal. Mistakes can be written off and dealt with and everyone can then go on to try again.