This is my column for this week from the Arizona Republic (permanent link).
For some, the most financially-astute course of action may be to fake their way to foreclosure
Looking for some good news in the Phoenix residential real estate market? So is everyone else.
New foreclosures are down, as are new foreclosure filings. Lenders are working with homeowners to help them stay in their homes, just in time for Christmas. That’s good news right?
Maybe. It turns out that, of the folks who negotiated loan workouts in the first quarter of 2008, 60% are back in default on their loans.
It gets worse. The typical newer stucco and tile West Valley tract home lost 7.41% of its value. In November. Year-over-year, that house is down 35.46%. Compared to its high in December of 2005, that property is down 48%.
Now there is a silver lining. If you bought your home in 2003 or before, and if you have resisted the impulse to refinance it, you’re probably still ahead of the game, at least by a little bit. And with interest rates at historic lows, this might be the time, finally, to refinance to lower payment.
And investors and first-time homebuyers could not have things better: The selection of available homes is still very broad, prices are below replacement costs, and interest rates are deliciously low.
Better news — for people who don’t own homes: Prices could go a lot lower, and interest rates could drop even more.
But what, then, is the implication for loan workouts? Until home prices stabilize and start to rise again, a loan workout against substantial negative equity might not make the best financial sense.
As we talked about last week, the hit on your credit rating from a foreclosure is a terrible thing. But it’s plausible to me that you could recover from that faster than your home will once again be worth what you’re paying for it.
And that’s the worst news of all: We have mismanaged our economy so dreadfully that, for many people, the most financially-astute course of action they can take is to pretend to be deadbeats, to fake their way to foreclosure. It worked on Wall Street and it can work on Mockingbird Lane, too.
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Ken Montville - The MD Suburbs of DC says:
That’s quite a suggestion!
I haven’t run the numbers but I suspect this line of reasoning was the premise for the “buy and bail” scheme on the Left Coast where people bought lower priced homes (all else being equal such as square footage, neighborhood amenities, etc.) and, thus, more affordable mortgages while faking a rental on their higher priced home before they stopped making payments.
Of course, the lenders caught on and stopped that nonsense.
However, the suggestion almost defines “moral hazard”. This type of behavior is, I suppose, the “hazard” some people were thinking about when the term was coined. Heck, if the Wall Street fat cats and Detroit triumvirate can fake a meltdown and get gobs of cash why not us? Morality, as such, is certainly going the way of the SUV and CDO.
I don’t like it myself. But, then, I’m not a big proponent of stealing, in general.
December 13, 2008 — 6:28 pm
J Boyer Morristown NJ says:
Those numbers sound horible. Whey would someone want to work out their mortgage problem under those circumstances? it does not make financial sence.
December 13, 2008 — 11:12 pm