Norwalk foreclosures and foreclosures around the country have been slow to move. Our current system provides a lot of rights to the delinquent borrower including weeks and sometimes months to get current with their mortgage. Obama’s “Making Home Affordable” plan gives delinquent borrowers even more time to get back on track.
All of these benefits may actually be hurting housing prices and slowing the recovery down, according to article today Housingwire.com. The article is about a working paper by the National Bureau of Economic Research. Their findings went on to say that keeping distressed owners in their properties is hurting local housing markets. The paper specifically says:
Our results suggest that the key to minimizing the costs of foreclosure is to minimize the time that properties spend in serious delinquency and in REO. On one hand, this implies putting pressure on lenders to sell properties out of REO quickly.
On the other hand, and perhaps much less palatably, it implies minimizing the time a borrower spends in serious delinquency, which means accelerating the foreclosure process.
To read the entire article from Housingwire.com, CLICK HERE.
Part of the problem with programs and laws that allow distressed owners to stay in their houses longer is that these owners abuse the rights given to them. In theory, these owners are given time to get current on their mortgage and back on their feet. In reality, many of these owners just stay in their homes for more time and still don’t pay anything. When the lender puts pressure on them to make them vacate, the owner can hire an attorney to drag out the eviction in court, buying them months and sometimes years in the house (for free) for only a small attorney fee.
Who is at fault here?
Don’t misunderstand me, there are certainly good and well-meaning people who use the programs and their rights under foreclosure the way they were intended, and don’t abuse the system. However, in my experience, they are the exception.
In order to arrive at possible solutions, we need to look at the incentive behind the system. What is the incentive to an owner to move out of their house that is in foreclosure? If they don’t have to pay, and they are basically being allowed to stay for free (or for a small attorney fee), then why would they move? The answer is they won’t. The problem with them staying in the house, is that the condition of their house is likely to deteriorate very quickly in the foreclosure process.
This about it, if you are going to lose your house to foreclosure, you probably aren’t going to keep the landscaping up very much. You will probably let the grass grow longer and the bushes grow higher. You probably won’t hire the pool company, and soon your pool will be a swampy looking green pond. If there is water getting into the basement every time it rains, you will probably just find a way to deal with it, and not fix the leak properly. In a few months you will end up with mold spores all over the basement that can work their way into the walls.
What does this mean for your property? It probably will become the eye-sore of the neighborhood, and when it sells (with all of its issues) it will sell for a lower price than the houses in the neighborhood bringing down the average of comparable properties whenever your neighbor goes to sell his own house. The longer that owner is allowed to stay in their house, the more likely it will need a lot of work when it sells.
Part of the solution to the problem is allowing lenders and banks to foreclosure in less time with less effort. I am not suggesting that they be able to foreclose in just a week, but a specific amount of time should be established that both the lender and owner must adhere to. The sad fact is that owners who go into foreclosure, don’t get back on top of their mortgages. Those houses need to go through the foreclosure process and come out as REO listings on the market.
The fact is that these distressed properties have to go the REO route and get back on to the market. The housing inventory has to be threshed out if we want to increase the long term health of the market. Owners cannot be allowed to stay in their houses for years for free if we expect a housing recovery to happen any time soon. Will it be easy and painless? Of course not, but most worthwhile things aren’t easy and pain-free.