Morgan Liddick: Foreclosure, the eighth deadly sin
February 25, 2008
Our good Senator Ken Salazar wants to save the foolish and the greedy from themselves, and he wants to use $10 billion of your money to do it.
The Foreclosure Prevention Act of 2008, due for consideration by the Senate tomorrow, would spend this amount of money to rescue homeowners facing the loss of their home through foreclosure. It would also provide $4 million in block grants for communities to purchase and rehabilitate foreclosed properties, and $200 million for “counselor services.”
Most insidiously, the bill allows bankruptcy courts to modify existing contracts, changing loan rates and other particulars by fiat.
To a person facing foreclosure, or to those who live in a neighborhood with a number of seized and vacant properties, this act must seem like a Godsend; everyone gets a free ride on the Reading railroad, passing “Go” and collecting $200 on the way. But before we all drink the Kool-aide of compassion, perhaps we ought to remember that there are two sides to every story, and consider all of this a bit more closely.
Are there predatory lenders? Without a doubt. Are there loan officers who would engage in sharp practice to fatten their bottom line? Indeed there are. Are they the norm in the industry? By no means; they are the rare exception. But then how did the current foreclosure crisis come about? If there are few villains among lenders, where should we look?
On the other side of the table, where we should find adults, not 5-year-olds. However …
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Full disclosure: I have bought and sold many properties during my adult life. I have never used an interest-only loan, never been involved with reverse amortization and only once have taken an adjustable-rate mortgage ” on an investment property. I have never paid less than 20 percent down for any real property. This is how people used to buy homes.
My conservative approach has sometimes resulted in frustration. I lived in rented properties far longer than I wanted. I missed an opportunity or two while I saved and waited. But in the end, I could buy without even a moment’s consideration of foreclosure. No, it wasn’t luck. It was prudence ” something about which people have forgotten.
My approach seems no longer to be an option. Nowadays, people have been trained from birth to believe not that they deserve to have what they can afford, but that they deserve to have what they want immediately, without considering the length of their purse. “I’m worth it” is a refrain in more than one commercial, and there are seemingly legions of believers out there. There’s a word for this sort of belief: greed. And greed ” as we are now re-discovering ” is dangerous, because greed blinds its host.
When you add complicated financing instruments, designed more to get the client into the home they want than to consider their ongoing ability to discharge the obligation of a mortgage, it’s rather like using a match to see if you have gas left in your snowmobile’s tank: no good will come of it.
Then there is the question of careful consideration of contractual obligations. The complaint from many now facing foreclosure is that they did not understand the documents they were signing. This is a breathtaking admission, particularly given the importance that contracts have in these United States. If the now-distressed buyers did not understand what was written, why in the name of all that is sane did they not simply point to the paragraph and say “What the bleep does that mean?” and not budge until they got an explanation that made sense to them? Was it pride? If so, it carried a pretty high price ” for all of us.
So no, I have no particular desire to open my wallet and yours to rescue people who wanted more home than they could afford, and damn the consequences. And in truth, there might be a better way than shoveling public money at the problem.
Already, it seems, many lenders are renegotiating terms of the most problematic types of loans with their customers who are in distress. This approach ought to be encouraged, perhaps through offering tax writedowns for the loss in value of non-predatory loans. This is a process with a long history in the U.S. lending industry, so novelty is not a factor. It has the added advantages of preserving both the neighborhood in which the potential foreclosure is located, and also the performing loan portfolio of the lender. In short, it’s a win-win outcome in most cases.
And it will cost us a lot less than $10 billion dollars.