Keeping It Real (Estate): Don't Ban Foreclosures!
Banning foreclosures is starting to gain momentum in Washington: This isn't good.
Barack Obama, the current frontrunner in the race for the White House, recently floated a plan for a 90-day moratorium on foreclosures by certain banks, along with other initiatives to revive the economy.
While Obama’s heart may be in the right place with respect to homeowners, current efforts to stem foreclosures by making it harder for banks to take back houses are largely misguided. Preventing banks from exercising their rights as debt holders could have negative consequences for all homeowners. For the ones facing foreclosure, a moratorium is likely to delay the inevitable.
Mortgage rates are kept low largely because banks can repossess a home if the borrower stops making payments. Even if a homeowner declares bankruptcy, the bank can still take back the house. It may seem cruel, but it’s one of the primary reasons banks are willing to give out hundreds of thousands of dollars in support of home ownership.
By taking away their loss mitigation tool, or even by threatening to limit their ability to foreclose, banks will demand a higher return for the risk they undertake in lending. This means higher interest rates, tighter qualification requirements and home prices far lower than they are today.
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We must find effective ways to limit the damage of the housing market’s collapse without endangering the eventual recovery of one of America's most essential markets.
Case in point: California. The epicenter of the housing market’s implosion recently enacted legislation forcing lenders to jump through additional hoops before starting the foreclosure process. Aimed at finding common ground between lenders and troubled borrowers, the state saw a dramatic 62% drop in notice of default filings -- which mark the start of the foreclosure process -- a month after the new law took effect.
On the surface this may sound encouraging, but digging deeper, it appears the data simply reflect a brief interruption in the prevailing trend. Sean O’Toole, founder of research firm ForeclosureRadar, told Housing Wire:
Given the significant negative equity now occurring in most California foreclosures, modifying loans to affordable levels either requires large principal balance reductions, or extending the unsustainable teaser rates that created the foreclosure crisis in the first place.
Wide-scale adoption of large principal balance reductions also poses significant risks, as they are likely to encourage non-defaulting homeowners to default in the hopes of securing similar reductions. As such, either type of loan modification is likely to result in increased default, and/or foreclosure activity in the future, a consequence clearly not intended.
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Poor credit implies they aren't ready. Undeveloped implies the same.
Jeesh - it's not the end of the world if someone doesn't own their own home. Part of the reason that we're in this mess is the assumption that ownership has some sort of magical effect on the occupants and neighborhood.
We rent right now after 7 years of owning a home. We fit the "classic" profile of homeowners: able and willing to do building maintenance, solid credit history, down payment, steady income. The direct reason why we don't own a home right now is because we have been competing for the last 5 years with people of "poor and undeveloped" credit, who have run up prices to unaffordable levels.
It really wouldn't be bad thing to go back to traditional underwriting standards. Make home ownership difficult again and housing prices will come back to something real.
Amy, I couldn't agree more!
We have become a nation of people that abhor consequences. No matter how grave (or trivial) our mistakes we expect somebody to 'fix it'.
We are breeding generations of people dependent on easy money who are unwilling to do anything that causes even minor discomfort. Things like delayed gratification or a work ethic are looked at with disdain.
How does a nation survive when its citizens have become too good to pick their own fruits and vegatables or clean their own restrooms?
We are addicted to credit and cheap oil and are even willing to tolerate preemptive war with all its glory of torture and death if it means we can stock up on junk at the Wal-mart at low, low prices.
Sooner or later this cycle has to end and we will have to pay the tab.
Why not now?
You're right -- everyone does not need to own a home.
However, there is a need for lending to those with less than stellar credit. People's credit gets hurt for all sorts of reasons, and one of the great parts about a capital allocation system like the one we have (that was very much abused in the past few years) is that for the right price, people looking to rebuild their credit, who are young, or just moved to this country can do so. Lenders who want to take on more risk for a higher return, can do so as well.
That doesn't mean everyone deserves a mortgage, or that we shouldn't tighten underwriting standards.
But by limiting home ownership to just those with excellent credit we also limit the upward social mobility that makes this country great.
Again, I recognize that the system was severely abused, punishing responsible people like you and have no desire to see things go back to the way they were during the boom. But I also don't want to see an overreaction that hurts more than it helps!
I appreciate the comments,
Andrew
I think that we mostly agree but I just wanted to clarify what "poor credit" means to me.
A poor credit history doesn't mean the easily explained occasional jobless period, medical crisis, family emergency, or late payment. Poor credit means that "I can't make the light bill on a regular basis and all I have is endless stream of excuses about why it that is." If lenders wish to lend to people who would barely qualify to rent, it's okay, but in the last 5 years they did not even come close to pricing in the risk.
And let's face it, young people with undeveloped credit don't need houses. They need to focus on learning to run a household which is probably best done while renting. They also need the flexibility to move to a job that allows them to be upwardly mobile. I did have a chance to buy a house (condo) when I was 22. Looking back, we would have been better off renting for a few more years.
In other words, traditional underwriting standards (20% down, stable income, solid credit history) did a pretty good job for both the bankers and the individuals involved. Far from preventing upward mobility, I think the traditional system encouraged it by keeping the playing field level and housing affordable.
Thanks for the reply - I suspect we more agree than disagree in the end. *grin*
I think we're already starting to pay the piper. And some of those "we're too good for them" jobs might start to look pretty good if the downturn drags on.
Well first off, no bank is going to walk away from profit. If they have to increase spreads to make up for increased defaults from poor credit borrowers, fine. But there not going to walk away from profit. The problem is that the spread changes. Especially if it is collateral driven. The idea that you can not "abuse" the system is to create a system that disregards changing trends. In other words, if defaults consistently drop on say sub prime borrowers and I looking for an edge in the market drop my spread and it pays off for 6 years because of collateral increase, am I wrong?
What drove this was the inexcapable ignorance that humans will always have.
Not trying to say mistakes were not made here, but what if the idea that it is not policy, it is not economic models, but humanity that did it! I mean, in the end we are all to blame, and the idea that we as humans can create a system devoid of crashes, failures, and mistakes is to say that we ourselves are not a mess of crashes, failures, and mistakes. If you believe that, you are lying to yourselve.
All that to say, free markets are the best because they allow us to have our hand slapped when we make a mistake. The idea that we can regulate our way, or change the future to keep from having our hand slapped is to say that mistakes will not be made.
I don't know what is scarier, having a free market that allows for consequence of humans that can never fully understand the decisions they are making, or a government controlled economy that ignores slapping hands as if mistakes are never made.
Actually, I do know, and I am very scared for our future.
and this was a time when there wasn't a housing crisis or bubble
only FDR's - everyone deserves to own a house did this skyrocket.
well IMHO maybe, maybe 50% of people should own.
Most other just don't get it!!
Besides, I need more rentals
See how at:
http://watchingmarcitz.wordpress.com/the-financial-bailout-according-to-animal-house/
- Marc
The thought of letting people get away with poor decisions is not an America that I want to be a part of.
People should have to repay the debt that they accumulate and the banks should pay for making faulty loans.
We are on a slippery slope on bailing out companies. Where is the line going to be drawn?
If a company folds then it should fall.
