Update: "National Moratorium on Foreclosures"

Make That Four Theories
(#4. Overreaction)

In my post on Thursday, "National Moratorium on Foreclosures," I puzzled over the seeming disconnect between the stocks of publicly-traded title insurance companies (barely affected), and the supposed tidal wave of claims headed their way due to defective mortgage foreclosures.

I posited three possible explanations: 1) the aforementioned companies don't have exposure in the markets where the problems are most severe; 2) they've already laid off their risk, through reinsurance, derivatives, or the like; and/or 3) the banks, not the title insurance companies, are going to take the hit.

Based on this week's stock market action, the clear winner is theory #3 (all the too-big-to-fail banks -- including Bank of America, Wells Fargo, and JP Morgan Chase -- had rough weeks).

SARS vs. AIDS

But I'd now also add a fourth theory: the problem, while serious, has been exaggerated.

Think of it as the financial equivalent of a possible health epidemic.

In 2003, much of the developed world was bracing for a full-blown outbreak of SARS ("severe acute respiratory syndrome").

The quick spike in (well-documented) cases -- fanned by all manner of media -- was certainly alarming.

And SARS in fact was extremely lethal if contracted.

But ultimately, nothing like the pandemic officials initially feared occurred.

Other scares like West Nile virus have followed the same trajectory.

It's too soon to tell -- all 50 state attorneys general are now looking into the matter -- but it's possible that the stories about homeowners with no mortgages having their locks changed in the middle of the night are the (rare) exception, not the rule.

At least in Minnesota, the fact that I haven't heard first-person accounts from a pretty broad circle of clients and friends tells me that that's at least plausible.