Saturday, March 08, 2008

Foreclosure relief

Back on January 28, I asked the question "When is a rebate, not a rebate?"

Now I ask about foreclosure relief. Seems there are two types of people who are being foreclosed on, first the man (or woman) who simply can't afford his (or her) house. Maybe he had some credit problems when he mortgaged the house and had to settle for a so-called subprime loan (I hate that term). Now the payments are going up. Or maybe some other bad luck has hitten, he's maxed out the credit cards, lost a job or other ways pinched. Bottom line, he can't afford the payments.

The second type of foreclosure is the person who looked for bargains, bought homes on the margin, with little or no money down. Now that home prices are falling, he owes more on the house than it's worth and the prices are likely to never (or at least not soon) go back up. His investment has lost money and he is looking to get out. He's decided to stop throwing more money at it and he will just let the house go to foreclosure.

Government is talking about some sort of foreclosure relief. In the short term, the banks are offering extensions before they enter the foreclosure process. This isn't really an extension, without this if a consumer contacted his bank he would already get extensions. Banks don't want to foreclose, they have enough houses and look at it as a lose-lose proposition. If they do foreclose, they lose money because they can't sell the house.

The short term solution is good because (hopefully) it will make some consumers wake up. They can re-negotiate their mortgage and possibly keep a house they might would lose. Sure it's a stop-gap, but it will help some.

Longer term, there are calls for banks to "forgive" parts of mortgages. I think this is a bad idea. If a house is now worth less than the mortgage, the bank "forgives" the execess mortgage amount. This rewards buyers who put little down or used bad mortgages. It also invalidates a contract. The buyer signed a contract to pay a certain dollar amount, now he's backing out. If the government forces banks to accept these contract changes, the banks lose and will likely not lend money as quickly in the future.

This mess was created over a period of several years, it will take several years to get out of it. Just because this is an election year doesn't mean an action has to be taken. Some people will lose homes, some people will not be eligible for loans. Some young couple who wants a home will be turned down and they didn't do anything wrong. It's just that now they look like a credit risk.

I encourage the government not to do anything to adjust mortages. I also encourage banks and other financial institutions to look carefully at future customers. Any who walked away from a house should be treated like the risk they are. Those who took out bad mortgages should also be treated as a risk.

2 comments:

Chance said...

Hi Randy,
I'm mostly sympathetic towards those who are going through foreclosure because of circumstances outside the mortgage, i.e. losing a job, sudden medical bills, etc... I feel that those who got an ARM should have known what they were getting into, and should have budgeted for the worst case scenario.

I do agree that contracts just shouldn't be ignored and reward those who made bad decisions.

I'm not sure how I feel about sub-prime loans. In a way, it is predatory on the less fortunate, but at the same time, it does give people somewhat of a second chance. But I do know this, ultimately it's an individual's responsibility to know what they can actually afford, but subprime or not, I think banks need to do a better job of evaluating what people can afford, and that's part of the problem.

Thanks for stopping by my site.

Randy Barnett said...

Chance,
I agree, those who have no control need some help. A leg-up if you will. Unexpected medical expenses is a major cause of these issues.

As for sub-prime loans, I don't like that title, but it is what it is. In some cases, it allows people to get a loan who otherwise wouldn't be able to get a loan. Our nation has enjoyed a lot of prosperity because of the easy credit that is available. Now it's time to pay the piper.

It's just a matter of who pays.

Thanks for stopping by. I've enjoyed your comments on Neil's blog and now I'm enjoying your blog as well.