Tuesday, June 2, 2009

Foreclosure: not really a big evil thing

This may come as a shock to anyone immersed in the mainstream news media reporting (hopefully it won't come as too much of a shock to readers of this blog), but foreclosure is not the end of the world if you are a home "owner" who bought more house than you could afford. In essence, you took a risk, a gamble, bought a lottery ticket to let yourself live above your means for a while and maybe strike it rich quickly and easily in the crazy world of real estate. If you're facing foreclosure now, your gamble didn't pay off, and now you need to move on; maybe try an honest living instead of the get-rich-quick approach.

However, it's not like it's the worst thing that could happen. In a less forgiving capitalist society, you might be required to pay off the entire loan amount you borrowed (as you would for a normal loan), and process which might effectively leave you in debt for a long time. Worse, in less lenient societies, you could be thrown in prison for defaulting on an enormous debt, especially if you did it with knowledge of forethought (ie: you knew you couldn't afford the payment, you were gambling on getting rich). You could also be publicly ridiculed as a deterrent, forced into indentured servitude to pay your debts, and/or made to endure other punishments to discourage such reckless and socially destructive behavior from others.

On the contrary, though, foreclosure is really kinda a boon in modern US society. In most cases, you debt is forgiven when the lender takes the house: there's no recourse for the lender to seize your other assets (sometimes there is technically, but rarely in actuality). There's no public punishment, humiliation, or even much scorn; the worst black mark is on your credit report, and even that fades reasonably quickly. The law is designed to force the lenders to effectively pay for your reckless gambling, and allow you to basically start fresh in a short period of time; an extraordinary opportunity, if you think about it.

So the next time you hear some imbecile politician bragging about all your money they are wasting on trying to prevent foreclosures, or some homeowner crying about how they might lose their home to foreclosure, or some mass media pundit decrying the rash of foreclosures, feel free to slap them extra hard (mentally, or physically if you want/can). Foreclosure is the process whereby the home "owner" wins, at the expense of the lender; they just need to find a new place to live, which is a small price to pay compared to what the alternatives could, and arguably should, be.


  1. This foreclosure business not only hurts the lender, but also each of us because of the bailouts that have been paid with our money, our children's money, and our grandchildren's.

  2. Well, I would draw a distinction between the foreclosure, which only hurts the lender, and the external actions, such as bailouts and market impact in general. The foreclosure itself doesn't hurt anyone outside of the lender (and the person who was effectively renting needs to find a new place to live). The external actions, such as idiotic bailouts and equally idiotic attempts to manipulate the market, do hurt every person in the country for generations to come. No argument here that everything the government is doing in the housing industry is bad for the country; I'm jut pointing out that people who decry foreclosure as this evil thing which must be stopped are also recommending actions which are harmful to the country and its people.

    And as a side note, thanks for stopping by. :)

  3. I think the problem with foreclosures is not with the people losing their homes, as sad as it is to be homeless (though in many cases the home owner has to take partial responsibility for the gamble). I think the main issue is the damage foreclosures do to property value. You have your house which may be fairly assessed at $275,000, but with 5 foreclosed homes on your same block, now your home is worth $215,000. So the investment you made in you home loses its value because of the foreclosure situation.

    Regaring the gamble, well it's a chicken and the egg situation... who's more at fault, the overreaching homeowner who gambled with the market, or the bank who issued the loan to a person with a shady credit history and a job that barely covers the mortgage, let alone other exepenses to gamble on the market? I say the blame is 51% to the banks, 49% to the homeowner.

    While I totally agree with your assessment here, I think fixing the home foreclosure problem is more an issue of making sure your honest investment in your home is secure rather than protecting people who made awful decisions.

  4. Asset values fluctuate; that's their nature. It's not a "problem", or "damage". A home (or any other asset) is worth what someone else will pay for it, and that value (like other asset values) changes with buyer perceptions and resources (among other things). It's a fool's errand to try to control what people want to spend on things, and an investor's folly to rely on short-term perceptions of value in your investment strategy. If you're at all sensitive to short-term changes in perceived value, you should not be buying a house.

    I would agree that the banks share some fault in creating the bubble, but in the normal market (absent idiotic bailouts), they bear those losses during the foreclosure process. It should not be the government's job to tell banks when or under what circumstances they are allowed to take risks: that's their prerogative in the free market economy. The government's only job should be making sure that if the risks don't pay off and the bank fails, it doesn't collapse everyone else, and that everyone owning part of or doing business with the bank is aware of the magnitude of risks they are taking; that is, putting limits to prevent systemic risk, and enforcing transparency (both of which they utterly failed to do effectively). It's fine for banks to gamble with their money, as long as it's only their money, and not our money as our government is allowing them to do.

    Honest investments in homes are safe as long as the government does not take your home while you are current on your loans/taxes/etc. As bad as our government has become (and getting worse by the day), I think it'll still be a while before we see outright property seizure for "the good of the people". On the other hand, any other investment value you perceive in your property (eg: down payment, equity, etc.) is transient based on asset value fluctuations, as as I said before, the government should have no business in trying to manipulate that. If you're counting on those "investments" maintaining their value, and/or wanting the government to try to preserve them, you should not be investing in housing, or participating in making government policy (in my opinion).

  5. Nick - email me over at LCR, it's over on the right side of the blog, I have a couple ideas sent from Conservative Generation for a collaborative process...
    Nice post BTW, when I have time, I'm going to throw in my two cents on this topic

  6. I agree completely. Helping people stay in houses they can’t afford is silly. Here are two possible (bad) reasons to do it.
    1. It slows down the rate at which banks have to admit a portion of their assets are bad debt, buying time to prevent savable banks from failing.
    2. Democratic voters are generally okay with gov’t money being used to try to help people, even if that help is questionable. Republicans think that homeowners, even if they’re really homedebtors, are more likely to vote Republican. So both sides have motivation to keep people in an owner-occupied home.

    Most of the bailout measures have been just been token efforts. The Fed buying large amounts of Treasuries to keep long-term rates low, OTOH, is a significant effort and possibly a dangerous move.

    I wholeheartedly agree that foreclosure is a good thing. Borrowers are eligible for a conforming loan (i.e. slightly and indirectly gov’t subsidized) four years after a foreclosure. And as you say, in some states the lender can’t sue the borrower for the deficit balance, even if the borrower has millions of dollars. What more do people want?

    I also disagree with the suggestion that foreclosures hurt property values. Things are worth what a willing buyer and seller work out. At most foreclosures force people to admit the market value of houses in a neighborhood faster.

    Why would we want to help property values anyway? If values go up, it’s a burden on a) first-time buyers and b) people who are moving to a larger house. This help is only good for people who are selling their house and not buying another one.

  7. Nice to see we're on the same page, CJ. :)

  8. If your home is worth as much as someone is willing to pay for it, and foreclosed homes hurt property values, then your house will not sell for as much as it is worth.

    Foreclosed homes 100% contribute to falling home values. When your home is being appraised, it is checked against houses in the area to assess its value. If there are foreclosued homes around you then it hurts your homes value siginificantly... in one case I saw, by $30,000.

    So CJ you are 100% right that foreclosed homes are in favor of the buyer, hence why it is called a "buyers market" right now.

    I don't think you're incorrect with your sentiment here Nick, except that the reason foreclosed homes are a problem is because it hurts your home's value. Your home is one of the biggest investments one makes... when the market is doing well when you sell it, you can get a siginifcant return on investment. Right now, selling homes *costs* you money in a manner or speaking.

    The media does spin it so say poor homeowners who lost their homes. Some people did legitimately get gipped, but the larger case was people were living beyond their means.

  9. Bad reasoning, Law: your house is worth exactly how much someone will pay for it, nothing more, nothing less. To say it won't sell for what it's worth is illogical, based on the first statement.

    Foreclosures change people's perceptions, which certainly alters home values, but many other things alter them also (tax laws, government subsidies, interest rates, seasons, general feelings on the economy, etc.). It's not a "problem" that people's perceptions change, and it's certainly not a "problem" the government should be literally wasting Trillions of our dollars to try to "solve". It's as asinine as the government spending Trillions to make sure all corporate executives can remain millionaires when people no longer want to buy their company's products; it's just dumb.

    Your home as an investment only makes sense in two ways: as a monetary investment or as a place to live. As a monetary investment, if you cannot handle market fluctuations, you should not be investing in that asset, period; I have no sympathy for those people. As a place to live, unless the government takes your home unilaterally, it's safe; note that this has nothing to do with any loan you may or may not have taken out using your house as collateral (if you default on a loan you should lose the collateral, of course). So as a place to live, your house is still a safe "investment".

    I think the error people make, especially people who bought into the bubble, is the hazardous and incorrect assumption that there are "investments" such as housing which "should" magically increase in value. What I'm pointing out is that foreclosure is merely the methods of paying off debts and losses incurred by making that investing error, while simultaneously taking out a loan you couldn't repay. Since you are only losing the collateral, you may get to live rent-free for a time, and it's not even a long-term black mark against you borrowing more money in the future, and the whole situation was entirely your fault, it's a pretty sweet deal for you (the home "owner"), and I'm sick of all the bleeding-heart liberals and morons crying about the poor poor gamblers who weren't able to get rich quick.

  10. I agree with everything Nick just said, and I would like to add that housing is something you consume, not an investment. In general inflation-adjusted real estate prices have stayed roughly the same for over 100 years. Most of the world's land is undeveloped and there are plenty of building materials, so at any time in history you can just create more housing by building it.

    People reasonably tie up a few hundred thousand dollars in real estate, forgoing returns on that money in exchange for a nice place to live. (Or they borrow money and pay interest; the math works the same.) Realtors sometimes call it an investment to get people to spend more of their money on housing, just as many salesmen say "why don't you invest in X?" when they really mean "spend your money on X".

    Stopping foreclosures won't make houses more expensive in the long-run. For that you'd have to limit the number of houses people are allowed to construct. That is the way to make Law's claim come true that housing is an "investment". Why go through all that? There are plenty of people creating a real value, new technologies, mfg processes, helping customers get jobs done, and so on. There are many things in the economy that create value. Why not try to shoehorn housing, which has been largely the same for 4000 years, into the category of investment?