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The Foreclosure Mess: Why We Need Better Financial Regulation

There has been quite a lot of resistance in some quarters to the creation of a Consumer Financial Protection Agency, and to regulation of the financial sector more generally. However, the recent news about foreclosures points to the need for better regulation of this industry. All of the sloppiness and corner cutting that was present when mortgages were first issued is reemerging in the foreclosure process. Without regulators looking over shoulders, how will these problems be corrected? The industry has proved again and again that it cannot regulate itself, so strong regulatory oversight is needed.

Foreclosure Fiasco

This isn't just an issue for individual homeowners. The speed of the economic recovery depends in part upon our ability to deal with the problems in the housing industry, foreclosures and all, and bring them to the best resolution possible for both homeowners and the economy more generally. What we are seeing doesn't serve either goal as well as it should. Setting aside whether it would have been better for the economy to try to renegotiate many of the foreclosures we are seeing â€" e.g. using write downs that impose losses on lenders rather than homeowners â€" any delay in getting bringing resolution to the foreclosure problems will delay the economy's recovery.

The problem itself is driven largely by securitization. Mortgages were "sliced and diced," repackaged, and sold as new securities and in the process it became very difficult to connect the financial assets to the underlying mortgages that they are composed of. In many cases, the bank holding the mortgage did not hold the title, and had little idea who did. Thus, when homeowners defaulted on mortgage payments, it was very difficult for the bank to show they have a claim on the house, a necessary step prior to foreclosure.

I would have preferred a process that allows more homeowners to stay in their homes, but that is water under the bridge at this point. This failure to regulate the industry effectively has produced a mess, one that will be costly for both the individuals involved and for the economy as a whole.

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