The Five Short-Term Benefits Of Rising Foreclosures

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This, of course, will upset some people. Let me give my disclosure: I’ve never been foreclosed on.

But many years ago I lost a house due to lack of money (after my first business, but before my second, third, fourth).

Close family members also have lost homes when I was younger and it had a profound impact on me. I also know many people in the process of foreclosure and I get the pain that it causes

Nevertheless, there is a positive side to foreclosure.

1) People have more money. This is common sense.  If you aren’t paying $2500 a month on your mortgage then you have an extra $2500 a month to spend.  Many of the foreclosures are occurring not because people lost their jobs (although that’s certainly part of it) but because mortgage rates got adjusted higher after scam mortgage issuers enticed borrowers with artificially low starter rates. The rates got higher, the borrower couldn’t pay, so he stopped. Hence, more money each month to spend for the borrower.

So  what do people do with the money? They pay down credit card debt. Its no surprise that since mid-2009, when foreclosures began going through the roof, that the stock of PRAA (the largest credit card debt collector) has gone up almost 300%. And their competitor, ASFI has gone up almost 500%! People don’t enjoy being in debt and giving up on the mortgage allows them to pay down and consolidate their smaller debts. Again, you can argue with this, but the proof is in the strong ability of the companies that buy debt from the banks to collect on those debts.  Additionally, personal consumer expenditures are at an all-time high. You can argue if this is good or bad. People stop paying their mortgage, they start buying things at the local mall, personal spending goes to all-time highs. Fact. Is this good? Well, more spending ultimately leads to more jobs. So you decide.

2) Foreclosed houses are cheap for investors. This is common sense as well. If the bank owns a home all they want to do is get rid of the property and get it off the books. The banks are overloaded right now with foreclosed properties. You can buy many properties for 10% of what they were initially sold for or less. The downside is that you are buying them “as is”, i.e. the bank did not make any repairs and the prior owners probably left the home in a state of extreme disrepair. But if you are handy, have the money, and want to work hard at navigating the loopholes and disadvantages of buying a foreclosed home then the advantages are extreme (you make a lot of money).  At some point the opportunity for investors is so great that a floor will be put in place on housing prices.

3) You can stll live in your home after you stop paying. I’m not recommending people stop making mortgage payments. The disadvantage is that your credit becomes so bad you might not even be able to rent again after you finally get evicted. But actually getting kicked out of your home after you stop paying the mortgage is often a six to eighteen month process depending on the lender and the state. So you have a place to live while you plan the next big move in your life, all the while you save the amount you would’ve spent on mortgages (and probably the money you would’ve spent on basic repairs).

4) Unemployment rate will eventually go down faster. This seems weird – why would unemployment go down faster. Here’s the basic idea: unemployment, like any market, is a function of supply and demand. Supply of jobs matched by the supply of demand for those jobs. The more people who own homes (i.e. are prevented from making a quick move) the more problematic it is for employers who want to hire people because their supply is purely local, i.e. the people who live in the surrounding area. The more supply there will be around the country. This doesn’t matter as much now with a 9%+ unemployment rate (there is plenty of supply) but as the economy continues to improve, this will make an enormous difference.

5) Banking regulations will improve. The banks are a mess and every day it seems there is a new scandal about who was foreclosed on inappropriately. This is a national shame and embarrassment. Already banks have slowed down their foreclosure rates (so the benefits of numbers 1-4 will keep increasing) as they look through their regulations and improve things so this doesn’t happen again and to as great an extent.

Ultimately the pain, embarrassment, and financial distress of being foreclosed on is not worth the benefits. But short-term, the foreclosure process is one part of the process of how a capitalist economy heals itself. Consumers end up with more money, employers have more possibilities to fill jobs (once things improve), other debts get paid off, spending goes up (temporarily), and banks improve their regulations.

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