19 April 2010

From Underwater to Foreclosure: One Anecdote

Most boomers grew up to believe bankruptcy was a sad, sad event. We feel sympathy for people who go through the process. Outside of a few cynical jokes about billionaires who file for such protection, we don't laugh when we hear that a friend has hit hard times and taken that route. Foreclosures? We grew up with no belief at all.

Regardless of what we know about sub-prime mortgages, we are now developing a new understanding of the foreclosures in our neighborhoods. How much of the turmoil is individual responsibility and how much can be attributed to the mortgage industry? That will be easier to say in retrospect. You know, 10 years from now.

In the meantime, I'd say the mood about foreclosures is not as sympathetic as about bankruptcy. Although the contract approach ("my mortgage is nothing more than a contract and my business decision is to walk away from that contract") has logic to it, most homeowners don't support their neighbor taking this route. All values drop as the number of foreclosures in a neighborhood go up.

But in some communities, the contract approach is losing its stigma. That's because so many homes are being foreclosed. I refer to Las Vegas, of course. Here's one explanation that a realtor shared with me:

You live in a $300,000 home, which you purchased at the peak of the housing bubble. You are able to make the payments on your $280,000 note. But you know you're underwater (your note is greater than the house would sell for) because the city's foreclosures are numerous and values have dropped dramatically. Those are the effects of the housing bust.

You notice that the house across the street from you is REO (real estate owned or bank-owned, meaning foreclosed) and listed at $150,000. You apply for a mortgage to buy it "as an investment."

As soon as all the paperwork is completed, you move into that house, paying monthly on a much smaller mortage. You stop making payments on your first home (the one with the $280,000 mortgage) and eventually your bank forecloses on it.

You've moved into a highly similar home, reduced your monthly housing cost, and kept your kids in their familiar school. There is a price to pay: just as it takes time to "recover" credit-wise from bankruptcy, the foreclosure will affect your credit for years.

Are all foreclosures the result of a calculated choice like that? Of course not. But anecdotes like this one help explain how foreclosures are normalized in people's thinking.

© 2010 Mary Bold, PhD, CFLE. The content of this blog or related web sites created by Mary Bold (http://www.marybold.com/, http://www.boldproductions.com/, College Intern Blog) is not under any circumstances to be regarded as professional, legal, financial, or medical advice. Or education advice. Or marital advice. Or even a tip.

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