As the crash in house prices continues the number of families displaced from their homes increases due to foreclosure, short sales, and strategic default. Since the foreclosures generally lead to an involuntary property eviction, many former loan owners are upset by the consequences for defaulting on their mortgage. Rather than accept the consequences for their mistakes, many who involuntarily vacated their houses portray themselves as victims deserving of special dispensation. Pandering politicians, mostly from the political left, have lobbied for increased loan modifications, foreclosure remediation, principal reduction, and other misguided policies to prevent those who defaulted on their mortgages from enduring the consequences for their actions.
The latest attempt to generate sympathy for loan owners comes from the Brookings Institute. Their recent paper titled, The Ongoing Impact of Foreclosures on Children, diverts us from the connection between mortgage default and the inevitable consequence of foreclosure with statistics ostensibly demonstrating the horrible impact foreclosures have on the lives of children.
I know how to save their house. Foreclosure is the answer…
Five years into the foreclosure crisis, many American families with children continue to lose their homes through foreclosure.
First, we do not have a foreclosure crisis. We have a debt crisis for which foreclosure is the cure.
Second, families find those houses lost in foreclosures. For each child displaced by an involuntary eviction due to foreclosure, another child’s family gets a new family home. Everyone overlooks the positive aspects of foreclosure. In fact, the new family is likely much happier and more stable because they are not as financially indebted as the people who moved out. Society greatly benefits from the housing bust.
An estimated 2.3 million children in single-family homes have already lost their homes to foreclosure, and even more – 3.0 million children – are at serious risk of losing their homes in the future. Another three million or so children may face eviction from rental properties that undergo foreclosure, suggesting that more than 8 million children are directly affected by the ongoing foreclosure crisis (see Figure 1).
Notice all the emotionally laden language about loss. Children “lose” their homes all the time. Parents take jobs and move the family across the country frequently. One of the strengths of the US economy historically has been the mobility of its workers (at least until about half of them got trapped underwater in their homes). Nobody is writing scholarly papers on the negative impact societal mobility has on children. The basic premise of this paper is deeply flawed.
As single-family and rental properties continue to enter foreclosure, children face not just the loss of their homes, but also the risk of losing friends and falling behind academically if they are forced to switch neighborhoods and schools.
And how do the children facing all this loss from foreclosure differ in any way from children whose parents took a new job in search of a better life? Do you see the silliness of this paper?
Children Affected by Foreclosures
Children are the often invisible victims of the foreclosure crisis.
Mortgage records do not tell how many children are in owner-occupied homes, and it is even harder to estimate the number of children in rental properties. Yet foreclosure affects not just the homeowner or landlord, but also the children living in the foreclosed properties.
The paper goes on to promote the previously failed policies of both the Bush and Obama administrations including loan modifications and principal reduction. The paper breaks no new ground and proposes no new ideas for solving this non-problem.
It’s not the children, it’s the parents
If children are negatively impacted by a foreclosure, it isn’t due to the foreclosure or even the eviction, its due to the parent’s reaction to their circumstances. Children are resilient, and if the parent’s deal with the change positively, the children will not be hurt. In the long run, since more families that go through foreclosure end up much more financially stable after they adjust to their new circumstances, the parents feel better, and the mood of the household improves. In that respect, a foreclosure brings closure to a bad situation and improves everyone’s lives, especially the children.
Should we condone HELOC abuse to save the children?
Today’s featured property is like many I profile. I assume at least some of the homes with rampant HELOC abuse had children living in them. If we bail out these families because they have children, what are we teaching those children? Aren’t we really showing them they can borrow irresponsibly and someone will bail them out? Moral hazard is not just an adult problem.
- This property was purchased on 12/25/1994 for $414,000. The owners used a $331,200 first mortgage and a $82,800 down payment. The owners lived in this property for over 16 years before they “lost” it in foreclosure… or did they really “lose” it by gambling on the correctness of the fallacies of the housing bubble?
- On 9/9/1996 they refinanced with a $350,600 first mortgage. That $20,000 in mortgage equity withdrawal was the beginning of their 16-year Ponzi journey.
- On 9/20/1999 they refinanced with a $390,000 first mortgage.
- On 4/23/2001 they obtained a $70,000 stand-alone second.
- On 10/19/2001 they obtained a $120,000 stand-alone second.
- On 4/9/2003 they went all out with a $620,000 first mortgage.
- On 12/17/2003 they bot a $45,000 HELOC.
- On 11/23/2005 they refinanced with a $750,000 first mortgage.
- On 5/15/2006 they opened a $50,000 stand-alone second.
- Total mortgage debt was $800,000.
- Total mortgage equity withdrawal was $468,800. That’s nearly half a million dollars in tax-free income.
- Their first NOD came in March of 2009, so they stopped making payments in 2008 at the latest. They were allowed to squat until 6/17/2011 when the bank took it back for $937,614. Total squatting time was over 30 months.
No sob story about sad children makes that behavior desirable or acceptable. Those people made dumb decisions the rest of us would never have made. They took risks a wise person would not have taken. They deserved to “lose” their home.
Yorba Linda Overview
Median home price is $502,000. Based on a rental parity value of $584,000, this market is under valued.
Monthly payment affordability has been improving over the last 7 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis declined from $249/SF to $246/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $183 last month from $2,650 to $2,466.
Rents have been slowly rising for 12 month(s). Price momentum suggests slowly rising rents over the next three months.
Market rating = 6
$749,000 …….. Asking Price
$414,000 ………. Purchase Price
10/25/1994 ………. Purchase Date
$335,000 ………. Gross Gain (Loss)
($33,120) ………… Commissions and Costs at 8%
$301,880 ………. Net Gain (Loss)
80.9% ………. Gross Percent Change
72.9% ………. Net Percent Change
3.3% ………… Annual Appreciation
Cost of Home Ownership
$749,000 …….. Asking Price
$149,800 ………… 20% Down Conventional
3.88% …………. Mortgage Interest Rate
30 ……………… Number of Years
$599,200 …….. Mortgage
$142,804 ………. Income Requirement
$2,819 ………… Monthly Mortgage Payment
$649 ………… Property Tax at 1.04%
$33 ………… Mello Roos & Special Taxes
$187 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$3,689 ………. Monthly Cash Outlays
($647) ………. Tax Savings
($882) ………. Equity Hidden in Payment
$198 ………….. Lost Income to Down Payment
$207 ………….. Maintenance and Replacement Reserves
$2,566 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$8,990 ………… Furnishing and Move In at 1% + $1,500
$8,990 ………… Closing Costs at 1% + $1,500
$5,992 ………… Interest Points
$149,800 ………… Down Payment
$173,772 ………. Total Cash Costs
$39,300 ………. Emergency Cash Reserves
$213,072 ………. Total Savings Needed
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
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