Are Foreclosures Good For America? Part 2 by Bill Roberts

The whole mortgage mess can be laid at the feet of Alan Greenspan and his zero interest rates which caused a huge run up in real estate prices, but it was swamped by the tidal wave of foreclosures brought on by accelerating price decreases when the rates went back up.

We all remember the Hay Days of the real estate market in 2002 through 2005. Interest rates were coming down on a daily basis. House prices were going up by the minute. Sellers were getting multiple offers on their homes with the lowest being the asking price. Home buyers were primarily concerned with how much they would have to pay each month, not the purchase price. As rates came down they could afford to pay higher prices.

Speculators saw what was happening. They realized that they could make an offer on anything and probably be able to sell it again even before it closed escrow. They could "flip" the house and make a fast, easy profit with no effort and no risk. Lenders facilitated this process by making 100% loans to these flippers. After all, there was no risk!

Then the party ended. The Fed began their program of raising interest rates. Home buyers could no longer pay higher prices for homes. The market leveled off.

Speculators could no longer buy something with any assurance of being able to sell it at a profit. They were now faced with trying to cover their transaction costs (both in and out) plus their holding costs (interest and maintenance) out of the difference between purchase price and sales  price. With a flat market this just wasn't possible anymore.

The flippers bailed out of the market. This caused a surplus of inventory. It was just a matter of supply and demand. Prices had to come down. And down they came. Faster and faster they came down as more and more property was put on the market.

Unintended Consequences

Congress wanted easier loans to extend home ownership. It is Public Policy that everyone should be able to own their own home. Expanding home ownership was the goal, but they didn't take into account what would happen if these people saw their situation as hopeless and stupid when they found that they owed more than their house was worth. Some just walked away, some tried to "sell short," and others waited until they were foreclosed. The dream of home ownership was extinguished for many people and some will never get it back.

It's the flippers that shouldn't have been in the market, not the first-time home buyers. We sucked them in and then blamed them for buying what they couldn't afford. Many here have called them undeserving and say that they shouldn't have been allowed to buy a home anyway. What a bunch of arrogant crap.

Now we are all paying the price

Bank foreclosures are threatening to totally destroy our whole financial market.  Banks that foreclose are finding themselves bankrupt because of the foreclosures.

What if there were no foreclosures?

If we look very hard at this issue we can see that foreclosing on somebody's home is destructive to all involved. We now have a homeless family, a vacant house, and a weakened bank.

First we need to deal with the homeless family. We don't want them living on the streets or in our parks, do we? If they couldn't make their mortgage payments they probably can't pay rent either. Maybe they can afford to pay rent but the landlords don't want to rent to them because the credit is not good. In any event we are going to need to step in and help them. Maybe we will have to put them into subsidized housing (section 8) or otherwise assist.

Secondly, we have the problem of the foreclosed house. It is an "attractive nuisance" that invites crime. Vandals come in and strip the house of everything of value. Other criminals come in to do drug deals or "shoot up." And then there are the squatters who move in. All of this activity has a tremendously negative impact on the neighborhood.

Finally, we are faced with the problem of the banks which are dropping like flies. Every foreclosure depletes some of their capital. Once enough capital is depleted the bank examiners are forced to declare the bank bankrupt and take it over. Who is next? Will it be your bank? Will you lose something if your bank is taken over? Are you getting the credit you need or want or has that credit dried up? Would your business be better if more people could get credit?

Something to Think About

Our irresponsible foreclosure policy has hurt everybody. And it hasn't done what it was designed to do. It has not protected those that provided the credit to purchase those homes.

If we had just left them in their home everything would have been better.

I hope we learn something by this. I hope that the foreclosure rules are changed before the next down market.