It increasingly appears that the only answer that the banks and our elected officials can come up with in the face of the foreclosure crisis is FREE RENT.
At the moment we likely have more than 400,000 households in California that are making no housepayment. There are 280,000 in some stage of foreclosure, and 120,000 or more that are not making payments but are not yet in foreclosure. From the time the homeowner stops making payments, until they are forced to leave can easily be a full year. If you take the original loan amounts at a reasonable 6% interest and the fact these owners have likely stopped paying property taxes as well, we are talking a cool $1B/mo in free rent statewide (which is likely artificially propping up the state economy now that they can spend it on other things).
Banks were among the first to jump on this bandwagon extending the time before they file foreclosure. Wells Fargo for example changed the time line for charging off home equity lines from 120 days to 180 days. Nationally 120 day lates are at a much higher percentage than foreclosures, confirming this delay tactic.
CA recently passed Senate Bill 1137, which extends the notice period for a renter in a recently foreclosed home from 30 to 60 days, nevermind the fact that a Notice of Default warning them of the need to move was posted on their door an average of 5 months before the foreclosure took place, or the fact that banks commonly offer renters $2-4k to move and leave the house clean.
Now we have the US Senate Banking Committee asking Freddie and Fannie to delay foreclosures for at 90 days. Seems the nearly year of free rent and the $2-4k in cash-for-keys, now ultimately at taxpayer expense, isn’t enough.
There is no doubt that this crisis if awful for homeowners in foreclosure, but delaying the inevitable, and handing out additional free rent is not the answer. If anything it incentivizes others to default as well. With the failures of Indymac, Freddie, Fannie, and the impending failures of Lehman, WaMu and others government intervention may be necessary. But free rent will do little more than drag this out, encourage additional defaults, and make it more painful for all down the road.
If anything it incentivizes others to default as well.
Completely agree. Politicians love plans that make good head-lines but are doomed for failure.
I mean, what sounds more noble than “saving homes from foreclosure”?
So while I’m paying incredibly high rent, the people down the street who remodeled their house and have BMW’s in the driveway are probably not even making their house payment? The U.S.A., the only place in the world where it pays to be irresponsible. What a sucker i am.
Not that it is much consolation – but of my friends the debt free ones are far happier then the ones with all the debt laden toys. I think the current credit crunch might be a chance for folks to find out how great it is to be free of debt. Some may find that losing everything was the best thing that could have happened to them.
I do believe 30 year home loans make sense – as they make for a wonderful inflation hedge (house payment stays flat as rents go up over time). I also think debt to fund a business or education makes sense – as those things create future income streams that should offset the interest costs.
If we completely forget that the banks put people in brand new homes with unsustainable mortgages, and they had absolutely no concern for the fact that they were loading up neighborhoods so that they had to colapse, and thus, dragging down the values on a great many home buyers that actually put $100,000 or more down… and even with that 20% down payment they are now dragged into foreclosure because of this debacle… then, we would have to overlook the fact that those innocent buyers might be able to stay in their homes and partially re-coupe their $100,000 investment by not paying approximately $30,000 in mortgage payments that they normally would have paid. But even at that… the good home buyer loses $100,000 to wreap the benefit of $30,000. Conversely… the buyer that put nothing down is just playing the suckers for all that he can… and the banks took that wrisk unwisely, that’s for sure, but they took that loss when they made the loan. Jim
Where is the 400,000 number coming from? I am not saying I don’t believe this is true. Just wondering how you arrived at this number.
It is a very conservative guess. We know that there are 280,000 properties in some stage of foreclosure from our own data. We also know that there are twice as many mortgages in default than in foreclosure according to the Mortgage Bankers Association. Finally we regularly hear stories of folks still in their homes long after the bank has foreclosed which we also don’t count.