Jun232016

Foreclosures helped families more than it hurt them

While foreclosures are emotionally painful, in the aftermath a new family moves in to the foreclosed home, and the foreclosed family loses an onerous debt obligation. It’s a win-win.

forget_renting_nightmare_alleyIt’s sad when someone is forcibly evicted from their family home. People develop strong emotional attachments to real property, so many people feel compassion and empathy for those enduring such a difficult loss. Since nobody wants to feel the pain of loss, many people suggest we should stop foreclosures.

(See: Should evictions be banned to stop hurting people’s feelings?)

When people rally to stop foreclosure, they forget there is a next chapter to the story. What happens to the family and the house after the foreclosure?

First, the house doesn’t sit empty. The distressed debtor who rented money from the bank to occupy the house and appear on title will turn over the property to a new buyer who is not as indebted. This new buyer will be able to sustain ownership under stable, government-backed financing terms.

Second, the family who left the house generally enjoys an improved financial life. With the crushing debt and onerous mortgage payment removed, the family was free to move into an affordable rental, generally in the same neighborhood.trashing_the_neighborhood

For most staying nearby was a practical decision because their children had friends in the neighborhood or school, and most delinquent borrowers still had jobs — contrary to the popular spin, most foreclosures were not caused by job loss but by toxic mortgages.

People with jobs stay in the area to keep it; plus, with few jobs created elsewhere, most people had nowhere else to go. As a result, there were no mass migrations associated with the Great Recession — no breakdown of the social order.

Housing crisis has led to breakdown of the social order, author says

By Andrea Riquier, June 9, 2016toxic_option_arm

Imagine the immense stack of papers that accompanies a home purchase closing.

Excited home buyers sign, sign, and sign some more. They sign even more now since the 2015 introduction of new regulations required by Dodd-Frank known as “know before you owe,” or TRID.

But does anyone actually read the documents being signed? …

What are we supposed to do about people signing documents they don’t read? Realistically, the notary would need to camp out for a week at each persons signing if they had to wait for them to read every page of the disclosures. Does this mean the people aren’t bound by what’s on the page?

But another, bigger problem, Dayen noted, was that Epstein, a nurse, had no clue what she was reading. She wanted to appear responsible and she wanted to understand the process, but it was beyond her. …

In many ways, the closing documents symbolize the structure and authority that the housing finance market creates, Dayen told MarketWatch in an interview. “I think the closing process is like the psychological way in which you’re taught that this is a very deliberate process that you can trust,” Dayen said.

But in the housing bubble of the mid-aughts, he said, “The fact that you couldn’t is the heart of the problem.” …

sign_documentsThis is the standard bullshit excuse offered by left-wing advocates. But this author makes a broader point that rises about the typical left-wing drivel: people should be able to trust the process, trust that the documents the are signing aren’t a complete ripoff, trust that the professionals who represent the signers reviewed the documents and vouch for it’s safety. That trust was misplaced during the housing mania.

The entire housing finance system was built on faulty, if not fraudulent, documentation, Dayen argues. Lenders cut corners, ignored regulations, and faked signatures to get as much fodder for the securitization machine as they could when the bubble was inflating. When it burst and the foreclosure crisis began, they repeated the process on the way back down.

That broad-based breakdown of the social contract, Dayen believes, not only cratered the financial system and the economy, but also is still rippling through American society today. …

“Even if you didn’t put people in jail, what you could have gotten was that legal exposure could have been used to create a sustainable solution on millions of mortgages. You could have had a much better and more effective solution to the foreclosure crisis than what we did which was let it bleed.”

In fact, Dayen believes that discontent over the housing crisis is largely responsible for the unconventional political strategies and strong-willed candidates of the 2016 presidential race. That’s not just about the fact that so many homeowners lost their homes or were left deeply underwater even while banks were bailed out, he said, but also about the failure of so many institutions Americans have always been taught to respect: banks, records systems, and courts, for example.

“What we’re seeing in our politics has a lot to do with this frustration over the lack of accountability,” Dayen said.

Yep.

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The following is a true story about foreclosure. Read for yourself and tell me in the comments if you believe this outcome was unjust.

Merry Christmas and happy new foreclosure

I bought an occupied house in Las Vegas at auction on December 7, 2010. These people liked this house, and they didn’t want to lose it. I was buying it eight days before December 15th when the local constables who handle evictions stop all activities for the holidays.grinch

Was I going to be Grinch this year?

Cash-for-keys

I always prefer a negotiated settlement to eviction. It takes too much time to evict, and the occupants aren’t too careful on their way out with their belongings.

These former owners have few tenant holdover rights. If i want them out, I can have them forcibly removed in short order. In Nevada, they get a 5-day notice to get out followed by a 3-day notice before the constable arrives to remove them by force if necessary. This is dangerous work, and they do carry weapons.

Technically, the former owners owe me rent from the day of the foreclosure sale. The typical negotiation is to offer free rent for three weeks with cash incentives if they move out quicker. The cost of money dictates that i can offer up to $500 per week if they are out early, and it improves overall revenues and profits.

I wasn’t about to expedite an eviction to see if I could kick this family out two weeks before Christmas. We negotiated a deal where they could stay until January 10th if they agreed to leave certain appliances, be careful when moving furniture, leave the fixtures and fans, basically leave the place undamaged so we can do preparations for sale quickly and with limited expense.mortgage-docs_free_money

Sue for unlawful foreclosure

We needed to exchange written documents, and they avoided meetings until it became apparent to us that these occupants did not intend to follow through on their agreement. Just before Christmas, we received a lawsuit notification, and with the justice system basically shut down the last two weeks of the year, we had no options, and the holdover owner got one last peaceful Christmas in their former dream home. I truly hope they enjoyed it. Denial has its rewards.

On the 3rd of January, we filed suit to get them removed, and after some legal finagling, we got a 30-day notice filed with a calendar set to expire in early March. These owners genuinely believed they were somehow going to keep this house. After more than two years with no payments, their house was called to auction, and now they are no longer on title. Only their bodies and their possessions remain.

loan_documentsAs the eviction clock is winding down, we get a communication from the owners asking us if our original cash-for-keys offer was still on the table. They would get out that weekend if I gave them $1,500. Of course, my first thought is, screw you, your willing to take my money after lying to me, suing me, and generally pissing me off. Go to hell! After a few moments to think rationally, I sent Jacki over with a big smile on her face to agree to their demands.

They got out in a weekend, I got the house in immaculate condition — I knew any loan owner in foreclosure who bothers to put out decorations and maintains their yard that well probably maintained the inside well. They did. We got the house on the market the next weekend (last weekend) with minimal fix up expense.

A bitter pill to swallow

explain_loan_documentsThese former owners loved this home. Jacki told me they were very bitter about the entire situation, the failed appreciation, the failed dodgy loan, the failed loan modification, the failed attorney savior. Despite the anger and bitterness, after telling their story, they were polite to Jacki when she inspected the property and paid them off.

When I think about borrowers like these, I do wish it had turned out differently for them. This particular family were peak buyers. They paid $399,991 for a property I bought 5 years later at auction for $170,000. The comps have weakened since I bought this property, and I will likely have to discount it to move it. These owners owed double what this property is worth today. What were they supposed to do?

The new family that buys here will enjoy a substantially lower cost of ownership. instead of the $2,500+ monthly cost the former owners had, the new buyer will spend less than $1,200 a month to live in this place. These people won’t have HELOC riches any time soon, but they will have a cost-of-living that leaves them enough spending money that the HELOCs aren’t necessary.dumb_idea

What is the best resolution for properties like this one? Do we give every existing loan owner principal reduction to keep them in place? Forgive the Ponzis their debts at my expense? I wouldn’t feel very good about that one. Would you?

Do we allow them to squat forever and deny the new family their home? Should we deny a new family the right to live in this home — a family that could pay for it?

And what happens to the people when they move out? Do they sleep on park benches? No. People who lost their homes in foreclosure moved in next door. And they paid less for their housing! Is this the travesty we must avoid?

Perhaps foreclosure is a good solution after all.

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[listing mls=”OC16127447″]