Monday, October 15, 2012

Will the True Victims Please Step Forward

Logic and good thinking is a hobby of mine. Conversely, dishonesty, misleading facts and poor thinking are very irritating to me which is why I probably I don't like most news reporting. I feel like a good value I bring is to help people see wrong assumptions and myths in the world around us, particularly in the financial world.
In the past I've resisted writing about housing, partly because I try to stick with issues that directly impact personal investing rather than broader issues of the world around us, but as Popeye would say, "That's all I can stand, I can't stands no more."
Let's talk about those who have experienced the loss of a home through foreclosure. What I won't dispute is the emotional difficulty of being in a situation where for whatever reason you are forced to move. Most of us have been in that circumstance for financial reasons, relationship reasons or career reasons. So by this, allow me to put the emotions of the situation aside and let's talk about the financial aspect of this.
Some of those who have been foreclosed on are victims. They were not educated on what they were doing. Others chose foreclosure as a logical alternative to paying a mortgage payment on a home worth half the balance of the mortgage - personally, I find no fault with this, accepting the negative consequence no matter what the result to the lender are simply the rules of the game. However, from my armchair observation I haven't heard this group complaining about losing their homes. Let me parse out a situation which is based roughly on national averages:
In 2004 a couple buys a home in Denver for $200,000 with a payment of $1,000. The home's value goes up to $250,000. In 2006, they decided to do what everyone else was doing at the time and cash out $50,000. By 2009, the market value of the home had dropped back down to $200,000 and the couple divorces and because neither of them could individually afford the home, they let it go (helping the decision is that they are upside-down on the mortgage). The foreclosure process takes 18 months between the month they last make a payment and when they got the eviction deadline. So, let's review the numbers, between buying the house is 2004 and when moved out was about 72 months. At $1,000 per month this is $72,000. However, they cashed out (tax free) $50,000 and they got free rent for 18 months (or a $18,000 savings). So 68 of those 72 months were free and they really only paid $4,000 (or what averages out over 72 months as less than $100.00 per month for six years).
Folks, it's simply not honest to look at these people as victims of the housing crisis. And foreclosure is far from a death sentence for one's credit - the couple would be able to buy a house three years after a foreclosure which puts us to today in the year 2012 in an environment where interest rates and housing prices are even lower than their first house.
The victim is the lender who took a large loss on a loan (my guess recouping $175,000 or so on a $250,000 loan minus the interest lost over a few years during the foreclosure process which of course extends several additional months after the people move out). Denver did not really have explosive housing growth like Florida or Arizona. We could run this scenario with those markets and you could easily imagine somebody cashing out a home and getting hundreds of thousands and not only living for free, but actually making money off their foreclosure.
Not everyone is in this situation and some people need help, but there are probably fewer victims than people simply going through foreclosure. It is not that I am unsympathetic, but as a whole although the banks have been villainized in the media, it's the banks who have taken more losses than individuals who we buying a home for the first time during the boom -bank loses are a shade less visceral level than for families.
Of course not all situations are like this situation; there are people who were elderly who cashed out or responsible buys who put 20% down and still became upside-down, but my guess is that a great deal of people approximately fit into this scenario.
The banks don't need an apologist. After spending almost a decade working in them in my career, I don't expect much love from my bank. Banks are what they are: for profit institutions. If you have money at a bank, just like any business you are getting a service with the assumption that they are making money off you. And there's no shame in this. However, in my opinion, someone who has enjoy free or reduced rent has in essence realized a profit not a loss, particularly if they carried out refinancings that gave them cash in excess of their cost. Financially, the homeowner was the winner and the victim was the lender.

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