The great journalist H. L. Mencken once noted that "[t]here is always an easy solution to every problem — neat, plausible, and wrong." That's a decent assessment of the current enthusiasm for an enforced nationwide moratorium on mortgage foreclosures. Fortunately, the Obama administration seems to be skeptical.
One can understand the pro-moratorium sentiment. Lending institutions including GMAC and Bank of America have instituted their own foreclosure moratoria in the wake of allegations that some foreclosure proceedings have not been properly documented. While most of these lapses appear to be technical rather than miscarriages of justice, there have been instances of people facing unwarranted foreclosures. Such mistaken foreclosures need to be resolved, and the victims compensated.
However, even White House top adviser David Axelrod acknowledged Sunday on CBS that "There are, in fact, valid foreclosures that probably should go forward."
While some people facing foreclosure are sympathetic victims, some buyers during the great credit flood precipitated by the Federal Reserve knew full well they were taking on mortgages they couldn't afford unless prices kept rising.
As Peter Wallison, a senior fellow at the conservative American Enterprise Institute, explained to us, a moratorium would be "disastrously harmful." Mr. Wallison, an early and prescient critic of Fannie Mae and Freddie Mac's mortgage practices, sees three dire consequences that would flow from a foreclosure moratorium.
Homes that could be resold will be kept off the market, and the process of finding the housing market's "bottom" — essential to restoring a market with realistic prices and the first step toward restoring the large economy — would be stopped. Second, banks would be deprived of expected income that would facilitate loans to small businesses and new homebuyers. Third, taxpayers would "get hosed" as Fannie and Freddie continued to lose money and rely on infusions from taxpayers.