Archive for October, 2010

Foreclosures

There have been steadily growing reports of invalid paperwork being used to foreclose on mortgages. This has now built up to the point where some large banks are suspending their foreclosure proceedings pending a review of the paperwork. This seems to be a legacy of the fast moving mortgage market before the crash; the banks were buying and selling mortgages so quickly that they weren’t careful with the paperwork. Now, when they need it in court in order to foreclose, they can’t find it.

A couple of things strike me about this. The first is that a foreclosure is a poor choice for a bank. They should be encouraging a short sale. The last thing a bank needs is a house, especially a house which will be hard to sell. It certainly won’t sell for the full price of the loan, so they have to write part of it off anyhow. They should just write off part of it, sell the house, let the borrower carry on their lives. It will get the bad loan off the bank books and won’t leave them with a house. I have to assume that the only reason the banks aren’t doing that is that if they foreclose they can continue to carry the house as an asset at the price of the loan, rather than having to write part of it off. That might be a good short term choice but it’s a terrible long term one, and it’s not good for the neighborhood of the house. Perhaps there is another reason, but what is it?

The second thing that strikes me is that none of the articles I’ve seen talk about how people are getting away with not paying their mortgage. Now, some people were definitely deceived by mortgage brokers when they took out an adjustable rate loan; it’s hard to feel bad for the banks in cases like those. However, other people knew what they were doing, and they made a bad gamble. Those people really should be declaring bankruptcy, and the bank should be getting back whatever the house can be sold for today. The banks are not solely responsible for the fact that many people paid far too much for their houses.

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