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Two Types of Foreclosures

Thinking about today’s housing news, trying to sort it all out. At the end of the day there are two (perhaps three) “types” of foreclosure. The first is what I would call the “traditional” foreclosure. Someone falls on hard times – medical issue, loss of job or major cut in hours and/or wages and, divorce, or similar. They’ve made the payments to date, but try as they might, they can’t keep up, and despite the best of intentions.

The second is a “bubble” foreclosure. These people borrowed the absolute maximum they could qualify for, put little if anything down up front, and even cashed out equity on one or more occasion, spending it on anything from new cars to vacations to paying juniors tuition.

The third would be the one who makes a business decision based on the current value of the home, relative to the amount owed and voluntarily turn the house back over to the bank via the foreclosure process.

Any “solution” to the housing crisis should not treat these cases the same. Reducing principle for someone who truly has fallen on hard times – there’s valid arguments for and against. Reducing principle for people who have already “benefited” via cash out refinancing or made money hand over fist flipping during the boom years. Hard to justify a handout for these cases.

Not only that – but what about when prices start rising again? Do these same people get to keep any future equity that is directly attributable to today’s principle reduction? If someone “paid” $400,000 for a house in 2008 – but they get $20,000 knocked off their loan – does that mean they really paid only $380,000? Can I as a non-owner sue the industry for intentional misrepresenting the asset price and using monopolistic practices to overcharge for a basic human necessity? (OK – probably not, but it exemplifies how much of a slippery slope this sort of an agreement creates)

Not only that – why give people “improperly foreclosed on” $2000? Granted there are probably a handful of people who were foreclosed upon despite the fact that they were current in their payment. But I’d be willing to bet that the majority of people who suffered from an “improper foreclosure” probably would have been legitimately foreclosed upon when all was said and done had the foreclosure proceeded properly. The robosigining is just a smokescreen and a stall tactic to help people stay in their homes (rent / mortgage free) longer. At the end of the day, these people didn’t pay and thus, should have been foreclosed upon. It doesn’t excuse the banks for not following procedure – but the idea that you now pay these people for their “troubles”. I just don’t see how this deal benefits the long term goal – stable house prices and true economic growth.

I’m part of the one third of American who don’t own a home. Who’s representing my voice in this mess? Is there any good that will come out of this deal? Fair or foul? What was the NAR’s role (if any) in the negotiation process? And most importantly what do you guys and gals make of it? Will it help, hurt, or have no real impact?

#housing