The Grand Bargain: Pro-Borrower Responses to the Housing Crisis and Implications for Future Lending and Homeownership

Abstract

The housing crisis has seen the number of foreclosures soar to heights unprecedented since the Great Depression. The explosion in the number of families being expelled from their homes has wrought many effects, both at the individual homeowner or family level and at the level of society as a whole. Such effects have not gone unexamined by scholars. This Article summarizes much of the scholarly literature to determine some of the major repercussions of the foreclosure crisis. At the individual family level, these effects include psychological and medical consequences, reduced credit, and financial losses. At the societal level, increased foreclosures can result in more crime, decreased home values, decreased social capital, and strain on judicial and municipal resources.

Given the demonstrable ill-effects foreclosures can produce, various policymakers and media commentators have proposed or recommended a motley assortment of approaches to alleviating the foreclosure crisis. This Article focuses on remedies in the legal framework for processing delinquent loans in state courts. Proposals have included enacting all-out moratoria on foreclosures, increasing the length of notice periods prior to initiation of foreclosures, increasing mandatory lender modification efforts, or changing burdens of proof or procedures within foreclosure cases.

The Article then identifies and analyzes possible second and third level effects of these proposals. These effects may include an increase in costs to all prospective home buyers, whether high risk or not, and a decrease in available credit for all prospective borrowers. Since these costs are borne by society as a whole as a result of legislation targeted at a relatively small proportion of delinquent borrowers, the Article seeks to explore the “grand bargain” between, on one hand, the need to protect borrowers from lender abuses in the case of delinquency and foreclosure, and on the other hand, the fact that the vast majority of homeowners will never need such protection.

Keywords: foreclosure, mortgage, mortgage crisis, housing crisis, home lending, homeownership, moratoria, moratorium, mediation, foreclosure mediation, fannie mae, foreclosure externalities, notice period