Are Foreclosures Good For America? by Bill Roberts

A lot has been written about our financial crisis: How it started; Who is to blame; And how much has it cost us.

But I think that this entire discussion has missed the main point: Was it necessary?

Let's look at the foreclosure process: If you borrow money to buy something and then you don't repay, the lender can come and get what you bought. Their loan to you creates a lien on the purchased thing, whether a car, a couch, or a house.

If you stop making your car payments the bank will send someone out in the middle of the night to repossess your car. The bank doesn't really want your car; they just want to be repaid. If they repossess a few cars they don't get hurt too badly and it sends a message to the rest of us: DON'T MESS WITH THE BANK. Their bite is worse than their bark.

Well, this same principle applies to mortgages. If you don't make your house payments they will repossess (foreclose) your house. But here the comparison fails. We already know not to fool with the bank. We know what they can do.

But when the bank repossesses real estate that loan which was carried on their books as an asset becomes a charge against capital. If they repossess enough houses they will consume all their capital.

Bank examiners and the agencies they represent require banks to have "sufficient" capital in order to stay in business.

When a bank's capital falls below a certain point the examiners will declare that the bank has "failed" and they will take it over.

We've had a lot of bank failures during this crisis.

When banks insist on making so many foreclosures it is almost as if they are "biting off their nose to spite their face." Don't they realize that they are flirting with disaster?  The bank examiners aren't going to give them a pass.

They say it is their right and their obligation to repossess your house. OK, but is it working for them or against them"

Is it working for us?

What would our economy and our real estate market look like if we hadn't had any foreclosures?

If you live in a neighborhood that has suffered from many foreclosures, how do you feel?  Do you feel safe? Are there vandals out there stripping those houses while they sit vacant?  Has your property value declined because of these foreclosures?  Have more of your neighbors just given up because they owed more than their house was worth. Are these vacant houses nuisances? Are they attracting "homeless" people who squat there?  Has crime increased in your neighborhood?

If we had it to do over would we prefer NOT to allow the banks to foreclose?  We do have it to do over. Everything is cyclical and we shall see this again. Maybe not exactly the same but close enough.

 I have more to say about this subject but I would like to hear what you think before I go on.  Please feel free to disagree.

 See Are Foreclosures Good For America? Part 2