Should we allow deadbeats to buy homes again to stimulate housing?

People who quit making payments and allowed their homes to be auctioned want another chance to own a home, probably for more free loan money.

Keith_RitterMany people who lost their homes because they stopped making payments and allowed the house to fall into foreclosure would like to get back into the housing market. If the standards are lowered and the waiting period after a foreclosure is decreased, these former owners could buy again and stimulate housing. But is that a good idea?

A small number of former owners endured a foreclosure because they lost their jobs and couldn’t make even a modified payment to keep their homes. If there is any group deserving of a second chance, it’s these people; however, there is no way to let them back in without letting in those who lost their homes because they HELOCed themselves into oblivion, and surely we don’t want to cut those people a break.

Home ownership is a privilege, not a right. It is earned through establishing sound financial management traits such as saving and paying bills on time to improve a credit score. A significant number of people who lost their homes in foreclosure lack those traits, and even if they were put back into an ownership position, they would likely fail a second time, and since taxpayers back most of these loans, making deadbeats homeowners again is not a good idea.


Foreclosure-Sale Rules Shut Out Willing Buyers: The Foreclosed-Upon

Designed to Prevent Fraud, ‘Arms-Length’ Policies Also Pinch Struggling Homeowners

By Joe Light, June 13, 2014 4:58 p.m. ETdanielle-earlsmaller

Last year, after being foreclosed on but before being evicted, Daud Sharif and his family thought they might have had a way to stay in their Andover, Mass., home.

A nonprofit civic-development group called Boston Community Capital offered to buy the home from Freddie Mac for $265,000—about 35% below the original mortgage—and sell it back to Mr. Sharif at a price that was higher than what Boston Community paid but lower than the price Mr. Sharif initially paid for the house in 2004.

Freddie Mac didn’t respond to the offer, selling the home to someone else for $270,000. Freddie Mac spokesman Brad German said the mortgage-finance company received multiple offers on the property and sold it to the highest one.

Elyse Cherry, chief executive of Boston Community, said her group wasn’t given a chance to counter. “We were negotiating in the dark,” she said. “We would have been more than willing to match or maybe offer more.”

Boston Community knew a counteroffer likely wouldn’t have mattered. As a policy, Freddie Mac, and its larger rival Fannie Mae don’t allow foreclosed homes to be sold back to foreclosed-upon families unless they can pay the full unpaid mortgage balance plus accrued interest and expenses.

At issue are rules designed to discourage borrowers from intentionally defaulting on their mortgage in the hope of buying it back at a lower price—and leaving Fannie, Freddie, investors and banks with losses.

This was a good and necessary policy to prevent strategic default. If people could have repurchased their homes at lower prices, the bail-and-buy phenomenon would have been so common that more charities like the one above would have sprung up to pummel the banks — which might have pleased many of us, but it wouldn’t have been good policy.

The mortgage giants also require that short sales—where homeowners are allowed to sell a home at a price that doesn’t cover the mortgage outstanding—be “arms length” transactions, in which buyers have no relationship with the delinquent homeowner.

Critics around the country, including nonprofit groups like Boston Community, say the foreclosure-sale and arms-length rules undermine their work seeking solutions to help delinquent borrowers keep their homes. They say the rules encourage homes to lie vacant, blighting local neighborhoods and hurting property values.

These non-profits are missing a key point about moral hazard. These people shouldn’t be allowed to keep their homes; they didn’t meet their financial obligations, and they need to endure the consequences.loan_we_cant_repay

Mr. German said the rules were put in place in response to a surge in fraud. “We did this to minimize our losses and to protect the taxpayer’s investment in our company,” he said of the short-sale rule.

Earlier this month, tensions over foreclosure-sale policies came to a head when Massachusetts Attorney General Martha Coakley sued Fannie, Freddie and their regulator, the Federal Housing Finance Agency, arguing that their policies violate state law. The law prohibits creditors from blocking home sales to nonprofits solely because they intend to sell or rent the home back to the original owner. A similar law took effect in Maryland earlier this year.

“Fannie and Freddie’s failure to do these buybacks is both illegal and unfair,” said Ms. Coakley, who is running for governor. She said she hoped new FHFA Director Mel Watt would change the policy after taking office in January. Ms. Cherry is the co-chairwoman of the Coakley campaign’s finance committee.

Fannie Mae and Freddie Mac haven’t yet responded to the lawsuit, and a representative for the FHFA declined to comment.

Some mortgage experts say that eliminating the foreclosure-sale and short-sale rules would be a mistake, but there is room for Fannie and Freddie to ease the rules.

“The [short-sale] policy may not be perfect, but I believe we would have more fraud without it,” said Clifford Rossi, a professor at the University of Maryland’s business school who spent two decades working in mortgage banking. On the foreclosure policy, he said that, “in some cases, it could make sense for Fannie and Freddie to allow the transactions” if the companies would earn more money than they would in a sale to a third party.

double-indemnity-HELOCPreventing moral hazard is not about dollars and cents, it’s about maintaining the integrity of the lending system.

Bridget Berg, senior director for fraud solutions at CoreLogic, a research firm, said lifting the arms-length rule could reduce capital invested in the mortgage market. “These are safeguards to protect the housing industry so investors will continue to invest and borrowers can continue to borrow,” she said. CoreLogic estimates that short-sale scams cost lenders about $375 million in 2011, the last time it made such an estimate.

The policies left Mr. Sharif’s family looking for a new place to live. Mr. Sharif, 56 years old, said he bought the 200-year-old colonial-style home in 2004 for $505,000 and made a down payment of a bit more than 20%, leaving a mortgage of about $400,000. He ran into trouble in March 2009 after losing his job as a software engineer. Mr. Sharif’s home was foreclosed upon in September 2010, several months after he found new work as a consultant.

Over the next couple years, Mr. Sharif said he tried and failed to work with his bank to make a deal in which he would retake possession of the home with a reinstated or modified loan that he could afford. Eventually, Mr. Sharif found a program run by Boston Community. The program so far has provided more than $73 million in mortgage financing for more than 350 properties, according to the nonprofit, using mostly money raised from private investors and foundations.

Since being evicted, Mr. Sharif and his family have rented a small house about a mile away from their old home. He and his son pass his former home every weekday on the way to his son’s school. “My son says, ‘It’s my house,’ ” he said.

No, it’s not your house.


Americans believe in redemption, and many would like to give former homeowners a second chance, and they should get one — after they’ve waiting the prescribed waiting period, saved money, and improved their credit score through disciplined financial management. Shortcutting those steps will simply put unqualified people back into home ownership temporarily, and we all saw how that turned out last time.

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