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Friday, March 31, 2017

How To Screw Renters and Homeowners

Homeowners want to preserve their home value.

Renters, or at least some of them, want to be homeowners one day.

But the so-called experts (including many politicians) on "the foreclosure crisis" have a way to hurt both groups. Even worse, they will make the real problem even worse, because our elected leaders and politicians either can't figure out the real problem, or they're too busy trying to buy support by giving more stuff away.

I've been writing about the "foreclosure crisis" ever since mortgage-backed securities starting going bad and home prices began to tumble, That was in the bad old days -- in other words, 2006 and 2007.

Foreclosures are -- wait for this -- a good thing!

Even for the family in foreclosure, it's a good thing. That family gets to "move on." What doesn't happen for that family is this: It doesn't get to live, rent-free, in a home it can't afford, not yesterday, not today and not tomorrow.

Why Do Foreclosures Occur?

Foreclosures usually happen for two reasons. 

The first is the obvious one: The family can't meet its monthly payment, falls behind and eventually "gives up" on paying. But the family isn't evicted right away, and not even for a few years! Foreclosure proceedings only start when the bank or investor holding the mortgage gets fed up with a nonpaying borrower (in legal terms, this is a "nonperforming asset"). In many states, including New York and New Jersey (both states in which I practice law), foreclosures go through the courts. In New Jersey, the average foreclosure period (that means the time from when foreclosure actions start in the courts, to the date of auction at the courthouse) is close to four years! (That's the longest period in the nation during which a borrower can avoid paying anything and stay in the house!) 

What happens during that time? Often, the borrower is pocketing the money he or she would otherwise be paying. That means some families in foreclosure are better off than they were before! 

How is that? I'll tell you! Because now they have cash.

And if you have been pocketing your monthly mortgage payment for three, four, even five years, that's a lot of money!

Meanwhile, those of you stuck in apartments, even subsidized Section 8 housing, can't move out and move up. Why? Because you're too busy working to pay your bills. And that is why you don't have the pot of gold these other people have. You're paying your bills; the people in foreclosure most often are not. 

The common wisdom in foreclosure relief is to "keep people in their homes." However, when you have an income problem and can't pay your bills, that relief is only delaying the inevitable and denying the obvious: The owner who can't afford the home and who needs to move out, ideally as soon as possible.

But the common wisdom, the politicians, and the people who run nonprofits to do "foreclosure assistance," either don't understand this, or those who do, turn a blind eye to it because they're too scared to lose votes!

As for the second reason for foreclosures, it comes from the lack of value of the underlying property. In the simplest terms, this is expressed by the phrase: The debt on the home is greater than the home's value. These mortgages are often called "underwater" and represent negative equity. These homes are often unmoveable, and fall into disrepair, but the primary reasons for that are either the refusal by the homeowner in foreclosure to sell (or dump) the property at a loss, or the bank's refusal to allow a "short sale" (where the home is sold for less than the outstanding mortgage) because then the bank has to recognize a loss on the asset.

The very opposite happens when a family defaults on its mortgage but still has plenty of equity in its home. That family may not be able to stay in that home, i.e., they can no longer afford the monthly payments, but here's what they can do and what they should do: They can sell the home. For a profit! And then turn around and have money, maybe enough for a down payment, on a less expensive place!

None of this should be taken to mean that expensive homes are immune to foreclosure. There will always be bull-headed homeowners who refuse to accept the inevitable, that they cannot afford to stay in their home. There are also plenty of expensive homes which are overleveraged. But more expensive homes are found in more desirable areas, are much more likely to be bought before falling into foreclosure, and therefore account for many fewer foreclosures than homes in lower-income areas with far less demand.  

A real solution to the "foreclosure crisis" recognizes that the neighbors and neighborhood are the victims, not the owner in foreclosure. A real solution incentivizes troubled borrowers to sell and move on, or for banks to do short sales and recoup part (but not all) of their loss. (The reason not to absorb all the banks' losses is to avoid encouraging banks to make more "bad" or "risky" mortgages to poor credit risks.)

The real foreclosure problem can be identified only when you figure out the real victim. The family in foreclosure, while sometimes a victim of circumstance, is not the victim of the foreclosure. The foreclosure victims are the neighbors, whose property values are threatened by a foreclosure and risk of an abandoned home becoming an eyesore, magnet for crime, or safety or health hazard.

This last point is recognized by some elected officials, because that is their impetus to help those in foreclosure on the hope that those "homeowners" will stay in their homes and maintain them. 

That approach is wrong. It is bad policy. It is also bad politics! 

A homeowner, who already has allowed his property to fall into foreclosure, or disrepair, or both, and who has been pocketing the money that would otherwise go to the loan payment, is not going to be any more responsible with someone else's money when he is getting it for free! 

If that home is an eyesore now, the government or a nonprofit throwing money at the old homeowner won't do anything to keep up the neighbors' home values, won't keep the rundown house from becoming more rundown. (Of course, you'll hear promises to the contrary, because people will do and say just about anything to get their hands on free money.) 

Our neighborhoods will be better off, they will be made more stable, and there will be fewer abandoned or dilapidated properties, if we stop trying to keep people in foreclosure "in their homes" and instead start using our scarce resources to move them out!

As for the elected officials terrified about losing political support, consider some points. 

First, people in foreclosure are few and far between. 

Second, people who are not reliable payers of their bills a hardly reliable voters. 

Third, as the self-styled affordable-housing activists are saying they won't support you unless you take their position of the day, you need to realize you are in an extortionate death spiral in which you will be induced to take ever more damaging positions as you seek to avoid the inevitable, which is to "lose" their support (which you likely never had and never will get) and ultimately an election. 

Fourth, you need to realize that for each voter in foreclosure you seek to appease with these foreclosure-victim appeals, you are alienating many more average voters. 

Voters who pay their bills and own homes are much more incentivized to be active in elections, to contribute to campaigns and to vote their pocketbooks. 

So if you're a politician torn between these two camps, can you figure out who can help you more, and who can hurt you more?

How you answer that question might decide your political future -- and if your town is lucky, its ability to have safe, stable neighborhoods and rising property values for its residents in the future. 







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