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Getting Closure on Foreclosure – Banks let owners live free in their overpriced homes

When someone says we don’t need banking and Wall Street regulations because capitalism will correct itself, it’s like saying we don’t need a guard rail at the top of the cliff because the bottom will stop the car just fine. We have financial regulations because capitalism rights itself with a severe hand. Regulations are intended as an intelligent way to foresee and eliminate behavior that we know ultimately leads to a destructive corrections such as The Great Recession.

The story quoted from below is an example of how capitalism corrects bad behavior, but it is also the perfect example of how we could have seen the right moves and made them earlier, rather than wait for the corrective punishment of economics to teach banksters a better way. The government could have forced such moves earlier when the banker’s greed kept them from seeing a better path, and the bankers would have benefited even while they believed the government was hurting them. I know we could have seen this better approach and saved a lot of people a lot of pain because I advocated such moves four years ago.

Susan Saulny wrote in the Sunday New York Times about a change in the relationship between banksters and homeowners that economic reality has finally forced on the banksters, thought it is now nearly too little, too late:

Forced by the harsh realities of the real estate market, lenders are increasingly likely to allow defaulting owners to remain in their homes — a change in attitude and strategy that is helping to buoy some neighborhoods while further slowing the nation’s foreclosure process.

Foreclosure flashback on the mortgage mortality scene

At the beginning of this economic depression, I said banks should do exactly what Saulny now describes as a way to to lessen the impact of a horrible tumble for themselves and for the world as a whole. They should have written down many loans to smaller principles because so many foreclosures will compound their losses by driving values down even further. For homes that were too far under water for it to make sense to write them down, they should have, in the very least, kept owners in the homes until the home finally sold as a foreclosure, giving owners more time to figure out other living options and preserving the integrity of the house and property.

Greed for a fool’s gold, however, typically comes with trunk-loads of denial, and that denial kept the banksters from seeing clearly the size of the wave that what was coming down on them. If the people at the helm of these national pirate yachts we call banks had good sense, they would have quickly changed course with the current, recognizing the sheer volume of the changing tide meant the usual course would no longer work in their own interest.

When you see a tsunami coming, you throw everyone a flotation device. You don’t try to continue polishing your yacht out in the bay. By creatively thinking of ways to throw homeowners lifesavers, they could have saved a lot of mortgage mortalities.

A little foreclosure float from the banks

Banks are finally throwing flotation devices to many people who are in too deep:

Some lenders are now willing to make deals with owners to let them stay after defaulting, offering to pay home insurance, for example, while the resident pays for utilities. Other lenders simply look the other way, quietly putting off foreclosure sale dates

One of the things this article misses, though, is that banksters never did become smart enough to change their minds  in order to “let” homeonwers stay in their homes. Banks were forced to do what was smart for them as part of the settlement of the fraud class-action suit brought against them by the U.S. attorney general and the attorneys general of all the individual states in the U.S.. One of the reasons I said the banksters got off lightly in that settlement is that most of the money required of them in the settlement was really a set-aside to be applied toward writing down mortgages and letting people stay in their homes, which was something that economic reality was going to force on the banks, regardless of the suit.

This is the logical rememedy the banksters should have put on themselves long ago — accept that a complete tidal change had taken place in the housing market and start taking steps to mitigate damages quickly. Greed always wants to hang on to the notion that the game isn’t over … that the players can still somehow right the situation they created or can manage to make a little more money off of it before it all goes down.

Greed kept banks from cutting their losses and writing down mortgages, and anger (apparently) kept them from, in the very least, letting owners stay in their homes while they foreclosed and sold them. The banksters wanted a little blood in exchange for their write-downs, so it just didn’t sit well with them to let delinquent homeowners stay in their homes, even if it was better for the bank … at least, until the house sold. As a result, the banksters wound up with hundreds of thousands of vacant and deteriorating homes around the country. That means they now have to write down the homes far more because, not only has the price of the home as it originally was gone down, but the home is no longer anything near what it originally was. The banks created a situation in which they now have growing portfolios of junk.

“Under normal circumstances, the banks would be able to cover the cost of maintenance, upkeep and property taxes by just reselling the property, but these are desperate times, and banks are resorting to somewhat desperate measures in some cases,” said Daren Blomquist, a vice president at RealtyTrac.

When the game is going down, you have to know when to fold ’em. I have always told people in a falling market to be wise and accept your losses quickly. Price below the market to sell immediately, or you’ll chase the market all the way to the bottom. Know, also, that most people will not price below the market because most are not smart enough to minimize their losses by making the cut quickly. Time and again I’ve watched people refuse to do this and end up selling for far less after a year or more of chasing the market downhill than what they would have gotten if they had leaped out by pricing below the market right off.

The foreclosure fiasco

Last spring I said banks were going to have to start dumping their foreclosed homes on the market by the end of that summer, driving the price down probably another thirty percent. I knew they’d need to start moving the homes quickly because years of property-management experience taught me that they would not be able to continue the maintenance buy zolpidem 12.5 mg costs on the numerous homes they had already foreclosed with no one living in them, and no one wants to rent a vacated foreclosed house because it could sell out from under them at any time. So, once you remove the owner, the house will certainly be vacant until you finally find a new buyer … not easy to do in a rapidly declining market.

The deterioration of landscapes, the accumulation of moss on roofs, plugged gutters causing rot, the mildew that grows inside of unheated homes, etc. all added up to mean these houses were either losing value to deterioration every month or costing money in repairs, grounds maintenance, vandalism, taxes and insurance every month. No matter what, time was compounding the banks’ losses. Homes go downhill surprisingly fast when no one is living in them and maintaining them. After just two years of vacancy,  a home will look derelict. A few homes foreclosed like that in one neighborhood will bring the whole neighborhood down in value, and that is exactly what has happened in spots all over the nation, compounding losses even more by taking not just the home but the neighborhood down in quality.

By spring of last year, many homes had been in foreclosure for two years, so that was the basis of my saying the banks would have to start doing whatever it takes to move them. However, a class-action law suit was filed against Bank of America and several other major mortgage holders in August. That caused the banks to put a moratorium on their foreclosures until the suite was settled so they could know the lay of the land before moving forward. Their foreclosure system had been revealed to be full of bugs … most likely outright criminal actions … so the banks didn’t know what each new foreclosure down the road might cost them in the law suit. Thus, they did not move the properties when I knew they would need to because a new and even greater risk posed itself in the form of this lawsuit with unknown costs for wrong maneuvers.

During the time the case played out, the banks began letting people stay in their homes without making mortgage payments  … not because the banksters had come to their senses but because they didn’t want to be seen forcing more people out while this massive case was being decided. I think this finally taught them that it is better to keep someone in the home when sales are this slow, rather than let the house and neighborhood go derelict. Keeping the owners in the home saved the banks from all the maintenance and tax expenses that would have mounted up on them during the case and kept the homes from deteriorating under vacancy. They finally saw from experience what they should have seen with foresight. As a result, it has finally become policy with many banks.

Economic prediction: the great foreclosure dump will finally hit this spring

A flood of houses built up behind the log jam that was created by banks waiting out the law suit results. So, I think the big onslaught of foreclosure sales is about to come now that the suit that plugged up the flow has been resolved.

The evolution in thinking was perhaps inevitable, experts say. Across the country, more than 644,458 properties were lingering in bank ownership at the end of January, but even more — some 710,725 — were coming down the foreclosure pipeline, according to RealtyTrac, a real estate and foreclosure analysis firm.

Over half a million houses caught in the log jam are now going to break free, and there are, at least, that many more that still need to enter the foreclosure process.

The evolution in thinking was the realization that it is better to keep owners in their home during times of mass foreclosure — even if you have successfully foreclosed on them — until the house sells because the original owners still want the place they live in to look nice while they are living there. They don’t want the neighborhood to see their disgrace. The home and yard will look better; the house won’t be vandalized; the neighborhood where the bank has other mortgages won’t start to look like a slum. It may, however, all have come as a realization too late.

The number of homes that remain in the pipeline should also cause a sudden evolution in the thinking of anyone who was rosy enough to think a few good signs in the housing market last month meant the market was recovering. Those who responded to last month’s news that way were either uniformed or not thinking things through. Like those banksters back in 2008, they are refusing to think about the sheer volume of foreclosures yet to wash over the land now that the legal log-jam has cleared. The housing market is likely to show a lot of change during the spring thaw even if banks are now smarter about keeping some owners in their homes.

The average time it takes to complete a foreclosure has nearly tripled nationwide, from four months in 2007 to about a year at the end of 2011… As a result, the relationship between many borrowers and lenders is softening from outright animosity to something that more resembles a détente…. In New York, the time to complete a foreclosure has almost quadrupled, from 263 days in 2007 to 1,019 days in 2011.

These late changes in thought have finally penetrated the dense gold-plated brains of bankers. Keeping as many owners in their homes as possible by writing down some mortgages will mitigate the flow of foreclosures, but probably not enough to keep prices from dropping further. There are so many homes so far underwater that foreclosure is still a better option than writing down the principal.

Many wonder why it has taken the banks and loan servicers so long to adapt. Andrae Bailey, executive director of the Community Food and Outreach Center in Orlando, said, “We are seeing lenders start to work with families in a way that would have made sense in 2008.” But he worries that because so many neighborhoods have already deteriorated, “it’s too little too late.”

Said the tsunami to the banksters, “My sediments exactly.” Only I was asking back in 2008 why banks were not doing this, rather than asking now why they didn’t do it back in 2008. It is now too late to avoid the deterioration in home and neighborhood quality that happened between 2008 and the present, and that will make today’s necessary foreclosures all the more painful as the value of everything is just that much lower. By refusing to cut your losses early, you take greater losses later.

 

You can read more of Susan Saulny’s article, “When Living in Limbo Avoids Living on the Street” in the New York Times.

 

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