Sometimes foreclosure is a strategy, not a disaster

SEATTLE, Washington - Media treatments of foreclosures often have an air of treating the foreclosee as a noble victim, someone who's trying to do the right thing but has fallen victim to extraordinary circumstances. An example of this is a Seattle Times story from May on government help for these unfortunate victims:

Aurora Loan Services is set to foreclose on her home overlooking Seattle's Puget Sound on Friday. Despite numerous calls, e-mails and letters, she says she's only been able to have one phone conversation with a company representative.

"It's like this huge, concrete thick wall that you cannot get through," said Inman, 58, who is working as a human resources consultant, but making much less than she was before she was laid off by the City of Seattle.

Let's ignore for a second that we have a city employee who can afford a Puget Sound view property - the tone of the entire article is (1) foreclosees are victims and (2) President Obama is riding to their rescue.

I get an image in my head after reading stories like this, of a cruel bank sending four masked goons to haul the hapless residents from their properties, one goon on each limb, perhaps as a hungry child looks on with a tattered doll in her hands.

First of all - if you're a paycheck or three away from falling into a foreclosure that you don't want to fall into, you should have mortgage insurance. I get solicited for such insurance every month, and I've determined that I don't need it. The woman above (in a view property on a municipal salary where a pay cut has resulted in her not being able to make payments) has simply not been responsible. But I guess this is why the people have elected the politicians that they have elected - to dig them out of these holes.

But beyond that - getting foreclosed is often a strategy for a property owner, not a disaster to be averted at all costs. A friend of mine back east is doing it, and explained his plan to me in detail. He has an underwater condo with a paying renter. He's done the math on his income from the rent and his various costs (mortgage, taxes, condo fee, etc.) and has decided that the best move is to just stop paying everything, keep collecting the rent, and let the slow slow process of foreclosure grab the place when the time comes. He's 60+ years old and doesn't give a damn about his credit rating.

I've always sensed that situations like my friend's are more common than the media are letting on, and now I have some evidence to back me up: analysis of the causes of foreclosure show negative equity to be the leading cause of foreclosures in the second half of 2008, not the reasons more commonly cited in the media (e.g. evil banks offering "teaser" loan rates that roll into higher rates that the victimized borrower cannot afford). Negative equity does not in and of itself make you unable to afford payments, but it may make a thinking owner (like my friend) decide that walking away is the best option.

Of course, all the government "fixes" to the foreclosure "crisis" are either shooting at the wrong targets or aren't likely to lower foreclosure rates much even if they hit their targets (as the WSJ article above discusses in some detail).

codicil: When it comes to real estate, nobody has a more blinkered, myopic view than realtors. An Arizona realtor has dubbed people like my friend "sympathy foreclosees" (who is being sympathetic to whom, I'm still not sure) and declared that Something Must Be Done:

Everybody loses in a sympathy foreclosure, the lender loses money, the buyer damages their credit and usually they neighborhoods with many foreclosures are less attractive to buyers due to high crime in some of these abandoned homes. Something must be done....