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