Thursday, August 23, 2007

Is the F Word (Foreclosure) Really all that Bad?

With all the front page stories about families facing foreclosure I thought I would try to explore the sympathy factor a little bit.

First let me preface this by saying, I tend to be a bleeding heart on many issues, which is why I have been confused with the media coverage on this one. I feel I should be sympathetic towards folks who are losing their homes....but, in certain instances I don't understand why the media paints this event as being so tragic.

I categorize foreclosures in two buckets.

The first small bucket is the foreclosure as result of some other major tragedy in one's life (like huge medical bills, job loss, death in the family, or divorce etc.). My heart goes out to these folks, as they have much larger problems to deal with than losing their home. In some instance they are truely in danger of becoming homeless.

The second big bucket is the foreclosures resulting from the housing bubble. These folks are facing foreclosure for a variety of reasons (couldn't refinance, appraisals coming in low, fraudulent documentation of income, ARM resets, to name a few). If they lose their home....is it really a bad thing? Worst case, they can rent a house or apartment like the rest of us. They are not on the path to becoming homeless.

Some sweeping generalizations.......
Housing bubble foreclosure folks are likely to take a credit hit, but lets not forget that a large portion of these folks had poor credit to begin with.
In cases where buyers didn't put any money down, which is likely to be a common scenario if they are having trouble refinancing, they aren't even losing any of their hard earned $$.

So where exactly is the tragedy....? In sum, they already had bad credit, they aren't losing their life savings, and they will save money by renting.

13 comments:

AgentBubble said...

Good post. I have sympathy as well for folks that lost their homes due to a catastrophic event beyond their control (job loss, death, etc). However, I draw the line when it comes to people losing their homes because their adjustable went to 11%, they bought a $500K home on a $50K/year salary, or they treated their home as an ATM.

Sippn said...

Yes there are some situations where it makes a lot of sense. Have a friend (in construction) loan adjusted from $2000 to $3500. Not only did he hand back the keys, he declared BK and rents for $1500 an equal home.

Think about it. . . . will take him less years to repair his credit than to recover the bubble price on his foreclosed home. Of course, he mortgaged the equity out of it, and that was a bad move, but many are in this position.

Gwynster said...

Ave,

We've talked a bit about our backgrounds in social activism and I'm right there with you. It's an interesting conundrum for us liberals.

I feel bad for a few people, very very few. Most people were just stupid and are now having to pay the price. And frankly, foreclosure is going to mean that many of these people who bought on the margins will be better prepared for further financial situations down the line.

Aggravated said...

Stop the Subprime Bailout

Can you spare a few thousand dollars to pay somebody else’s mortgage?

Congress thinks you can, especially senators Christopher Dodd and Hillary Clinton. What’s more, a lot of the people you’re being asked to bail out lied on their loan applications or signed up for loans without reading the terms.
Here’s what’s going on, as explained by Caroline Baum of Bloomberg.com:

During the housing boom of the last five years, people with bad credit histories, many of whom lied about their income and nature of employment, got mortgage loans they weren’t qualified for to buy houses they couldn’t afford. Now that house prices have stopped rising, and the house can’t be refinanced or sold at a profit, Congress wants the taxpayer to subsidize the mortgages so these folks can remain in their unaffordable houses.
The proposal to bail out subprime borrowers may seem humane, but it’s wrong. The argument is that borrowers who signed up for subprime loans had no idea what they were doing. They didn’t understand the loan documents, or didn’t read them. Some borrowers may have been victims of predatory lenders (whose stocks have already surged on talk of a bailout). But many more borrowers simply gambled on risky loans in hopes of flipping property for big profits, or knowingly lied about their income just to get a bigger house. Don’t reward these irresponsible people with property, paid for by you and me!
Politicians will exploit your emotions by saying they want to help people “keep their homes”. But remember that the people in financial trouble already had houses. They got into this mess by trying to buy bigger and fancier houses than they could afford.

more: ttp://patrick.net/housing/contrib/nobailout.html

mr big said...

No bail out please.We all know most of these forclosures are from speculation went bad.Are we supposed to act stupid like the government and wonder what went wrong? I feel for a few people on hard times and that is it.The rest can go cack to apartments or their mothers where they belong. Housing is way overpriced and legitimate borrowers are priced out.Let prices come back down to reality as the market will do for us. Keeping home prices at unrealistic values will screw everyone in the long run. This has been the biggest credit bubble in history and some pain will be felt.

buying time said...

If I had to guess I think its the financiers who are pushing for the bailout to save their shirts (not us liberals).

http://biz.yahoo.com/cnnm/070823/082307_gross_homeowners.html?.v=2

Gwynster said...

I'm actually a Bill Gross fan. This guy gave the industry a heads up as far back as 05'. He even pulled a Jerry Brown and sold his house and rented as an example.

That said, I'm really dissapointed that he of all people is calling for a bailout.

Patient Renter said...

Regarding people who lose their homes due to catastrophic events, this is an occurance totally separate from the housing bubble. It always has happened and always will. Regarding the current forclosure "crisis", I dont think such catastrophic cases should even be discussed since they aren't directly related to the current "crisis".

As for everyone else, I have little sympathy... just rent.

Cmyst said...

I'm a liberal, and I have two kids who are sweating it out on foreclosure, and even so I say NO BAILOUT. Pretty much like the rest of the country, one of my kids has been frugal and his misfortune was in believing last year that if he didn't buy, he would be priced out forever. He bought a very small 2/1 in the Bay area. I feel for him. He and his wife want to start a family, and they thought they were making a sound decision.
The other kid and his wife, not so much. I love them, and I'm sorry they've been foolish, but they've been warned by several of us that their lifestyle is not normal or sustainable given their income. I wouldn't bail this kid out, and the thought of the government doing so is kind of aggravating, because IHMO this is a learning opportunity for them. This is the kind of situation that will possibly turn them into savers and they are still very young -- it isn't at all a lost cause. But if they get a bail-out, they will learn nothing.
I'll say it again: I've been in way too many working class homes and seen way too much bling. People KNOW that they can't afford this stuff. The possible exception is an elderly person with senile dementia, but even in that circumstance there is usually a younger relative who is profiting from the serial refinancing of the home.
It's hard to muster any sympathy for the legions of REIC rank/file people who made triple their normal commissions for years and didn't bother to save any of it. And I feel no sympathy for Wall Street.

fishtaco said...

my understanding is a foreclosure will put a major ding on your credit for something like 7 years. so not only can you not get a loan for any amount of money, but when you try to rent and the landlord checks your credit, you are effectively screwed. For example, what happend if you are middle class, over bought on your home and got squeezed into a foreclosure. Where are you and your family going to live? Rent a room in a hotel downtown? It is just not something that many people have had to consider or deal with. You also don't hear much about it because of the stigma attached with such a failure.

Cmyst said...

I've had a major ding on my credit several times in my life, and I've never been homeless.
In the case of my kids, both of them were warned several times not to sign on to ARMs and were encouraged to rent/continue renting.
When people make bad financial decisions, their credit rating SHOULD take a major ding.
It's my feeling that with the number of families going through this situation, there will be an adjustment on the part of property managers and owners who are hoping to get their properties rented out.
I think everyone is aware that mortgage costs are about twice rental costs, and that affordability is the key factor in driving people into foreclosure.

Gwynster said...

Fish,

If you look on CL, there are lots of ads where people state they'll take folks with bad credit. You'll even see ads for new homes in Natomas and West Sacramento where they are begging for Section 8 renters.

Will go from forclosure to rental be comfortable? nope and neither should it be. But it can be done without blasting families into the dark ages.

PeonInChief said...

A bailout is more likely to benefit speculators than the folk who decided that this was their only chance to buy a house. Were the lenders to renegotiate the mortgages to lower interest rates and extended terms (50, 60, 70 year mortgages), most who purchased with ARMs still wouldn't be able to pay the mortgage. Those few who could pay would be stuck with the house for a very long time. (Many of those folk would also likely default eventually anyway.)

And it's likely that foreclosures won't have much effect on the ability of tenants to rent housing. There will be so many people with foreclosures on their records that it will become a nonissue. Landlords already seem to be lowering their standards anyway, as the vacancy rate rises.

However, tenants should be VERY CAREFUL in selecting a house to rent. It's not unlikely that many houses in preforclosure are being rented to tenants who can bring money to the table. ("Since your credit isn't very good, I'll need six months of rental payments upfront.") Any lease signed by a tenant would be voided by foreclosure and, at this point, banks seem to want the houses vacant.