Foreclosures Revisited

As we’ve watched the real estate crisis spiral out of control, I’ve noticed that a lot of people have been puzzled (and sometimes indignant) that various lenders have not made greater efforts to avoid foreclosure operations. The idea is that if you give people a chance to continue making the payments on their home you will continue to make money on them, whereas if you foreclose you will just gain control of a house you may not be able to sell – or might have to let go at pennies on the dollar. Unfortunately, the flaw in that logic is that it assumes that the borrowers in question can actually continue to make payments, if you adjust the terms of their loan or give them a grace period – which, apparently, is not always the case…

Consider, for example, the case of people who will fall behind on their payments again, even with more favorable terms. The lender has no real motivation to help them; they’ll just fall back into the same crisis eventually, and if you wait to foreclose on them there is always the chance that they’ll decide to vandalize the property (it happens a lot), pull off one of the second-house purchase scams we’ve talked about in this space, or some other form of shenanigans. Then there are the people who can get through the crisis on their own, whether by working three jobs, borrowing money from family members, jeopardizing their health, or whatever. The lender has no real motivation for helping these people, either; they’ll make it through on their own. It’s only the people who will be okay in the future but can’t get back on track that lenders have an interest in keeping out of foreclosure – and therein lies the problem…

According to a report cited by The Washington Post online, when you remove these two groups from the equation, the number of “easily preventable” foreclosures is no longer a particularly large percentage of the ones that occur. We could argue, I suppose, that the consequences to our society of these foreclosures, not to mention the human cost of turning people out of their homes, should give lenders an added motivation to keep from foreclosing whenever possible, but this argument also has issues. Having lending institutions go under will not help the current financial crisis; it will only put even more people out of work. Having lending institutions that have received Federal bail-out money fail will not only contribute to the crisis, but will also prevent those institutions from ever being able to pay off the bail-out money themselves. Which means that the ultimate losers would be anybody in America who pays their taxes…

In the long run, neither the government nor the lenders can really afford to keep people who can’t (or won’t) make their mortgage payments from having to pay them. We can eliminate the more egregious loans made before the bubble burst, rescue the people who can make reasonable payments (and those who meant to do so all along) and keep anybody who has even a distant chance of actually surviving in the long run from being driven from their homes. But the people who took out mortgages on second homes they didn’t need, investment properties that only made sense if the “bigger idiot” principle was in play, or anything they had no intention of paying off in the long run is probably going to lose. In fact, we could probably debate the question of whether or not they deserve to lose – but that’s a post for another day…