By Sanders, Barrett
American Banker , Vol. 156, No. 223
In recent months, Congress has debated ways to minimize the risk of losses from federally insured depository institutions, from insured lending programs run by the Federal Housing Administration and the Veterans Administration, and from lenders such as Fannie Mae and Freddie Mac.
One relatively simple reform Congress should consider would be national mortgage foreclosure laws for all federally related mortgage loans.
In recent years, the federal government has become the primary underwriter - directly or indirectly - of most mortgage credit in the United States.
A Clear-Cut Link
The federal link to commercial real estate lending is becomming increasingly clear as the Federal Deposit Insurnce Corp. assumes the burdens of depository institutions rendered insolvent by commercial mortgage loan losses. The FDIC is inheriting those mortgages, and must enforce them or foreclose.
The federal subsidy to residential mortgage credit is even more clear-cut. The primary sources of nearly all conventional residential mortgage credit in the United States today are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. Because of the implied or real federal backing for their securities, Fannie Mae and Freddie Mac are able to generate and provide mortgage credit at a rate with which private credit sources cannot compete.
Banking regulators have recognized the enhanced credit worthiness of the mortgage-backed securities issued by these agencies by allowing depository institutions to reserve less capital for this type of investment than for an investment in a whole mortgage loan.
Red Ink for FHA Program
The federal subsidy for FHA- or VA-insured mortgages is direct and explicit. In recent years, the FHA insurance program has generated red ink.
While the federal government is directly or indirectly underwriting most mortgage credit in the United States today, enforcement of that credit remains subject to the kaleidoscopic laws and regulations of our 50 different states, plus the District of Columbia and the U.S. territories.
Those state laws vary from extreme efficiency (from the creditor's point of view) to intolerable delay or inefficiency. Texas and Georgia provide for foreclosures to be completed in 30 days, with no contest. By contrast, in a number of states, a borrower has up to one year after foreclosure to redeem his or her property by repaying the debt.
In addition, the 50 states have two different types of mortgage foreclosure systems - judicial and nonjudicial.
Jurisdiction of States
This complexity is grounded in the legal history of our country, which traditionally has left real property laws, including foreclosure, to the states.
What has changed in recent decades has been the fast-growing centralization of mortgage credit to the point we have reached today: the U. …