would you buy a foreclosed property?

foreclosed

Foreclosures on homes happen for a variety of reasons. Maybe the homeowner lost his or her job.  Maybe they overextended themselves on the mortgage.  Maybe they have a health crisis that sucked up their life savings.  The homeowner could be an honest, hardworking person forced by circumstances to default, or the homeowner could be a bum.  Anything is possible.

Yet the reaction by the bank holding the mortgage often seems to be “if the homeowner can’t pay $3000 per month, let’s seize the home and resell it to someone who will pay $2000 per month.” Perhaps that is the best way for the bank (or whoever lent the money in the first place) to admit that they made a mistake.  But maybe it’s just that the bank wants to punish someone who can’t pay the full amount by giving their property to someone who can’t pay the full amount either.

If I had a job paying $50,000 per year, and the company determined that someone else could do it for $30,000, I’d argue that I have some advantages over a new guy – I know people at work, I don’t have to be shown where the copier is, etc.  If I was a homeowner about to be foreclosed on, I’d argue that the bank should keep me on at a new, lower rate because I have advantages over a new buyer:  I already live there, my stuff is there, and most importantly I am physically there.  A new buyer might take months to find, and during that time the house would sit empty.

Should banks work with existing homeowners? What if the homeowner was stupid and overextended himself or herself when buying the property?  What if the homeowner had a medical disaster (cancer or some similar problem) that made payment difficult?  What if the bank has no realistic hope of selling a foreclosed property for more than a fraction of the home’s (old, pre-bubble) value?  Would a widespread move toward simply reducing mortgage payments set a bad precedent for the lending industry?

I know that if I make a contract to pay a bank $2000 per month on a mortgage, I shouldn’t expect them to reduce that to $1000 if I fall upon hard times. I wouldn’t expect them to raise it to $3000 if I got a raise at work.  But with communities being emptied out and foreclosed properties sitting empty for months at a time, wouldn’t keeping existing homeowners in their houses make sense?  It’s not an easy question to answer, because the obvious answer is “this is capitalism at work,” followed shortly by “if you can’t pay your debt, you don’t deserve to keep your property.”  Too many crazy mortgages were given out, but even omitting those you might see foreclosures on truly distressed homeowners.  Whether banks should have compassion or simply stick to the profit motive is a tough question in the worst cases, and I think it reveals one of the few weaknesses in the capitalist model:  human suffering for profit.

photo by dok1

13 comments

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  • I wouldn't have any problem buying a foreclosed house. I don't think buying or not buying that type of house really makes a statement about your opinion on the banks actions.

    Unfortunately it seems that when most people fall behind in their payments, they never get caught up even if the bills get reduced. I think the banks have made that assumption

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  • I agree that it sucks when a person gets foreclosed. Most of these folks aren't speculators or house-flippers who gambled and lost.

    On the other hand, I think a lot of them did either just take the mortgage broker's word for it, or else gambled that by the time the ARM adjusted, they'd be able to swing it. Even if you sympathize with these folks on the basis of mortgages being hard to understand (which they certainly are), it's just not a good idea to bail people out when they drive themselves onto the rocks. If you do that, then next time more people will be less careful and the problem will be worse.

  • Not sure I understand the “profit motive” aspect of this one. If a bank makes a loan for $500k and then takes it back due to foreclosure and eventually sells it for $300k, was any money “lost” on the transaction? Was any money gained?

    The loss on the loan of $200k would be written down, showing a loss of profit. OR, they could keep the existing homeowner in the house and write it down…and still take the loss, no? What's the difference? There must be some accounting rules that favor kicking out the original homeowner and selling the house to somebody else or else, as Steve alluded to, just keep the original owner in the house, write down the loss on the first loan, and “do over.”

    What am I missing?

    • I am not sure an accounting rule makes any difference. Generally foreclosure is a known aspect. Or it has been in the past. One issue that impacts it is MBS (mortgage backed securities) and how the industry has designed a system so the bank no longer owns the notes on the homes.

      They break them up and sell them off (a subject worth many pages of explanation) so have difficulty renegotiating a lower rate for the existing homeowner. Plus how do you determine who gets a lower rate? With foreclosure, the owners credit takes a huge hit, the bank gets to right down the notes (so the investors take the capital hit), issue a new loan (pocketing the fees generated by selling a house), and reselling the mortgage again.

      Plus there exists a lot of data to show that homeowners who get lowered rates eventually default anyway or at least a large percentage of them.

      Given this, I would buy a foreclosure if it was the house or investment property I wanted. The homeowner gets no benefit whether the house is bought or not. I am not responsible for their not being able to pay the loan back. But I can improve my wealth by getting a good house at a great deal.

  • I don't have a problem buying a foreclosure. At that point the previous owner is already gone, so I”m not worsening their situation.

    Banks should handle each delinquent homeowner on a case by case basis. Many people simply bought homes they couldn't afford and mishandle their finances and those people shouldn't have the banks cut them slack. But other people simply fell on hard times and got in a bad situation, for those cases it may be best for the bank to work with the existing homeowner.

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  • There's a house across the street from my parents house that is being foreclosed. How do I find out who to contact to buy the property?

  • I'm not sure I understand your math. Is this a US phenomenon? My home (in Canada) was purchased in 2007 from a bank after the owner could no longer make his payments, but I paid perhaps 5-10k below market value. I understand that this is because banks have no interest in holding homes, so look for quick sales. But I definitely did NOT get it for 2/3 of the market value. I wish.

  • If the original owner couldn't pay $50,000 of mortgage, what's the guarantee that they will be able to pay $30,000 in the mortgage. The fact is that the bank has lost their trust, and they would rather try their “luck” with some other person instead of trusting the same person with a reduced rate.

    As a person who owns a rental property I can understand Bank's dilemma because when a renter refuses to pay in time and then finally just stops paying then the first thing that comes to your mind is not to negotiate but to kick the person out and replace with renters who can pay in time. If there was a choice extended to me to choose between existing renters at a reduced price of the rent, and someone else with the reduced price of the rent, I would prefer the latter based on their credit rating compared to existing ones who couldn't keep their promise.

  • If the original owner couldn't pay $50,000 of mortgage, what's the guarantee that they will be able to pay $30,000 in the mortgage. The fact is that the bank has lost their trust, and they would rather try their “luck” with some other person instead of trusting the same person with a reduced rate.

    As a person who owns a rental property I can understand Bank's dilemma because when a renter refuses to pay in time and then finally just stops paying then the first thing that comes to your mind is not to negotiate but to kick the person out and replace with renters who can pay in time. If there was a choice extended to me to choose between existing renters at a reduced price of the rent, and someone else with the reduced price of the rent, I would prefer the latter based on their credit rating compared to existing ones who couldn't keep their promise.