Let Foreclosures Happen? Wrong…

Recently, I was forwarded an article written by housingwire.com publisher Paul Jackson, challenging the notion that housing is central to the economic recovery ahead. The crux of the article cites a recent study that found no disparity between consumer spending in major metropolitan areas with horrible real estate markets, versus those with more stable housing markets. The conclusion being perhaps the housing crisis isn’t the focal point of the current recession and maybe we should go ahead and let banks foreclose and collect on their notes en masse.

Wrong.

While the studies findings may in fact be accurate, I don’t believe Mr. Jackson’s conclusions realistically portray the possible outcome/consequences of stopping the homeowner assistance programs and the start of widespread foreclosure and pursuit.

For starters, people who have been foreclosed on in high foreclosure regions, but whom are still spending money, clearly haven’t been pursued by their lenders yet for the balance. I’m confident someone having to pay back a $100k, $200k or $500k deficiency would be struggling financially far beyond this studies findings. In fact, they’ll be repaying their lender, who isn’t currently lending to anyone. So their money, which was going into the economy, is now moving around within their bank – meaning bonus to bank executive, nothing to local storeowner.

What would happen to all the homes owned by the banks? At the moment, there are approximately two million shadow foreclosures – homes that have been foreclosed on, but haven’t been released for sale. If the number is that high while people are being offered assistance, imagine where that number will balloon to when the assistance goes away. What will that do to the property values of the people who are still paying? Better yet, with all those foreclosures popping up on peoples credit reports, who will be left to buy this huge stockpile of abandoned bank-owned homes? Banks are not real estate management companies, so the thought of them maintaining all these homes is laughable. Neighborhoods will fall into disrepair and squatters will be rampant.

Additionally, the idea that the problem is rooted in and around people living in homes they couldn’t afford in the first place is disingenuous. Sure, there were plenty that fall into that category, but the majority could afford their home when it was purchased, they just can’t afford it now. There are very few people I’ve encountered in my life who haven’t experienced some sort of temporary hardship over the course of their lives - unemployment, health issues, divorce, etc. Or maybe I just know some really unlucky people. That we’re in a recession/depression only amplifies the problem. In the past, you could get over these temporary hurdles by refinancing. Or if that didn’t work, by selling. You can’t do that anymore, since the majority of homeowners in a number of markets are underwater. Nationwide, one in four homeowners owe more than their house is worth.

While I agree that lowering an interest rate isn’t going to do a whole lot, principle reductions and short sales/deed-in-lieu’s will. If someone has a solid payment history and is currently employed, reduce their principle. Sure, it will mean less for the lender, but they’ll be ok. They’ve likely made tens to hundreds of thousands in interest as it is, so the “loss” will likely be offset by what was already gained. Not to mention, what they will continue to make by keeping their customer in the home and paying.

If someone has lost their job/has no income, let them attempt a short sale or deed-in-lieu. Allowing someone to find a new buyer and save the lender the cost of the foreclosure process, in return for being released from the deficiency will do far more for the economy. New buyers will move in and resume making mortgage payments, albeit for less than the never-should-have-been-worth bubble prices. The lender won’t have to assume the costs of caring for the homes and they’ll likely be picking up new customers. Sure, the same lender won’t always/likely pick up the mortgage of the new buyer, but they’ll pick up enough that it will all even out.

So there you have it. Loan modifications might not be the answer, but neither is foreclosing across the board. Principle reductions and short sales/deed-in-lieu’s are our best way out of this mess…