Temporary pauses in foreclosures have expanded among major lenders as the courts, lawmakers and state attorneys general investigate whether banks supplied shoddy paperwork to support evictions of delinquent borrowers.
While homeowners may cheer efforts to get tough with banks, an increasing number of analysts warn that that a blanket ban on foreclosures could further hobble the economy.
A major securities lobbying group said on Monday that a US-wide foreclosure moratorium would be "catastrophic."
The Securities Industry and Financial Markets Association (Simfa) said foreclosure processing mistakes should be fixed but said dramatic nationwide action could unjustly impose losses on the investors who help provide credit to the US$11 trillion (RM34.21 trillion) US mortgage market.
"It is imperative... that care be taken in addressing these issues to ensure that no unnecessary damage is done to an already weak housing market and, in turn, that there is no further negative impact on the economy," Sifma chief executive Tim Ryan said in a statement.
Disclosures that some big mortgage processors filed affidavits without proper scrutiny in thousands of foreclosure cases has drawn calls from some prominent lawmakers and civil rights groups for foreclosures to be halted in all 50 states.
But it's not clear if any individual or single regulator has the power to impose a nationwide moratorium, with most mortgage regulation conducted on a state-by-state basis.
President Barack Obama has so far declined to back such calls, despite polls showing that voters angry about the sluggish economy and high jobless rate are set to punish his fellow Democrats in the Nov 2 congressional elections.
Investors who buy mortgage-backed securities free up money that can be used by lenders to make new loans.
The market for such securities nearly dried up during the height of the 2007-2009 financial crisis, but the instruments have rallied since March 2009 as investors bet depressed prices more than account for losses that will come as homes backing bad loans are liquidated.
Moody's Corp warned on Monday that most residential mortgage-backed securities could see losses increase because of delays in foreclosures.
Moody's said in its weekly credit outlook that foreclosure delays would impose higher carrying costs on loans and reduce the ultimate recovery amount once the properties are liquidated.
Bank of America, the nation's largest mortgage servicer, said on Friday it would temporarily halt foreclosures nationwide as it reviews its foreclosure processes.
JPMorgan and Ally Financial Inc's GMAC Mortgage have announced partial moratoriums, but some other leading mortgage servicers have said they have no plans for a systematic halt.
White House adviser David Axelrod said last Sunday he was "not sure" about a national halt to foreclosures.
Federal Housing Administration (FHA) Commissioner David Stevens said the administration does not believe a nationwide moratorium is the right action at this time.
"Any kind of broad moratorium will simply stall home sales," Stevens told Reuters on Sunday. The FHA provides mortgage insurance on loans by approved lenders.
Jim Gaines, an economist with the Real Estate Centre at Texas A&M University, said investors in mortgage-backed securities are facing increased risk from the push for foreclosure moratoriums.
He said these investors previously had peace of mind that the value of the underlying property would help cover their investment risk, but the investors cannot get at that value if a moratorium holds up foreclosures.
Gaines said if investors in the secondary mortgage market start viewing mortgage-backed securities as riskier, that could lead to higher borrowing costs for future homeowners.
"What we've added is an element of legal and political risk to the mortgage market that will ultimately get priced in," Gaines said. — Reuters
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