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If the former owners in question leave the houses they're occupying, then they'll go live somewhere else. Which wouldn't change the supply of available homes. I

If the former owners in question leave the houses they're occupying, then they'll go live somewhere else. Which wouldn't change the supply of available homes. It might lower prices, but I'm not sure why you would consider that a problem in and of itself: at the margin, that helps renters and hurts owners. Our society goes to great lengths to transfer cash from renters to owners, so a tiny change in the opposite direction doesn't strike me as a huge problem. Given current rent to own ratios, such reductions are needed to bring the system into balance anyway. And leaving the current home they're in vacant will reduce its value. Specifically, vacant foreclosed properties suffer all sorts of problems that reduce their value: animals infest the properties, thieves steal the wiring and plumbing (which destroys the walls), leaks spring and since no one notices, water damage accumulates quickly, etc. Plus, neighboring homes will lose value as well: no one wants to live next to a vacant structure that has sustained major water damage or is being used as a base of operations by criminals or vagrants. Keeping people in those homes prevents most of these value-destroying problems from happening. When good assets are trashed, our whole society is made poorer.

yummyfajitas 16y ago
If the former owner downsizes, moving from a large home to a small one, the supply of housing goes up. And I don't consider lowering prices to be a problem. Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner. The new owners would be more likely engage in maintenance of the home (why fix the roof of a house you are going to be kicked out of) and the new owners will be people of better moral standing. Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet. It's possible that the downsides to leaving outweigh the upsides, but it's by no means certain. There are both upsides and downsides, and it's very far from obvious which way the balance goes.
- MichaelSalib 16y ago
  Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner. In many parts of their country, there is a large excess of supply, so it is unlikely that a quick sale is possible. Which means that the house will likely sit on the market for 6-12 months. In some areas, banks are walking away from properties they foreclosed upon, legally abandoning them. The responsibility for maintaining or demolishing the property then reverts back to the original mortgage holder, who often gets no notice and believed that they had nothing to do with the property since it was foreclosed. Under such circumstances, I think it can make sense for people to refuse to move out: if the house will continue to be an open ended obligation for you, you might as well at least get a place to live out of it. See this article for more information: http://www.cleveland.com/news/index.ssf/2009/07/bank_walkaways_from_foreclosed.html http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa... why fix the roof of a house you are going to be kicked out of Two reasons. (1) Because you don't like rain water poring over your head while sleeping in bed. No one wants to live in a house where rain water is poring on them. No one wants to live in a house where mold and mildew have taken root from pooling water. And no one wants to share a house with raccoons. (2) Homeowners often develop irrational attachments to the home that they "own"; that is why many people buy homes when doing so makes no economic sense. These irrational attachments may incentivize people to maintain homes when rational calculation suggests they should not. Remember, being a "good" homeowner is a key concept of many people's self-image. Doing things like fixing leaks and tending the yard may continue to matter to them even after they've decided that they're not paying another cent. Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet. I don't believe this claim is true. Can you cite anything justifying it? In many areas, foreclosure takes a long time because servicers and courts are overwhelmed with volume; this state of affairs benefits banks who can postpone marking their assets properly. I don't consider lowering prices to be a problem. Sorry; I misread your comment. Given how little evidence we have that this phenomena affects a significant number of people, I don't find claims that this will materially change market prices to be credible.
  - yummyfajitas 16y ago
    Concerning bank abandonments, that's interesting. Obviously if the bank abandons the home, the homeowner can legitimately live there. As for fixing the roof simply because it makes the home uninhabitable, I don't buy it. Unless the fix were cheap, I suspect most people would probably just leave. Why spend $5,000 fixing a home you will be kicked out of, rather than just move out? Or instead of moving out, you could just put a bucket under the leak and move your bed, on the theory that you'll probably be kicked out before the leak gets that much worse. Regarding mark to market accounting, my understanding is that a mortgage is treated as a "held to maturity" asset, while a defaulted home is treated as an "available for sale" asset and must be marked to the market. Thus, the bank must mark the loss only when the home is foreclosed on (not sure when in the process this rule kicks in). And yes, it benefits banks at the expense of investors. Personally, I see value in preventing this.
anamax 16y ago
> If the former owners in question leave the houses they're occupying, then they'll go live somewhere else. > And leaving the current home they're in vacant will reduce its value. You're assuming that these houses will be left vacant. In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so? Yes, the "right price" is probably a lot less than what the bank is owed. They should take the loss for dumb lending.
- MichaelSalib 16y ago
  You're assuming that these houses will be left vacant. Many will be left vacant for some time. Foreclosure is a slow process, even when the mortgage holders are not fighting you every step of the way. In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so? According to the statistics compiled by CalculatedRisk, that seems unlikely [1]. Many housing markets (not just Detroit) are still very sluggish. There may be tons of buyers for properties in hip urban areas where most HNers live/work, but most foreclosures have been happening in suburban/exurban areas whose real estate markets are still in the toilet. The national housing market has a very large stock of uncleared inventory, so vacancy should be the default assumption until that inventory returns to normal. This article [2] suggests that you're wrong regarding homes in Ohio. If there were really "plenty of people who would be willing to pay for those houses at the right price", then I don't we'd be seeing banks walk away from foreclosed properties and abandon them. [1] http://www.calculatedriskblog.com/2010/05/existing-home-sales-inventory-increases.html http://www.calculatedriskblog.com/2010/05/existing-home-sale... [2] http://www.cleveland.com/news/index.ssf/2009/07/bank_walkaways_from_foreclosed.html http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa...
  - anamax 16y ago
    The CalculatedRisk stats say that houses aren't moving at current prices. That says nothing about what they'd do at lower prices. Even if all that happens is "move up", things are better for the folks who got to move up. (And there's less net economic loss if we lose the inexpensive places than the more expensive ones.) More likely, you'll get smaller and more households, as the run-up to the burst had people living together for economic reasons. Since I said that Detroit wasn't an exhaustive list, it's curious that another member of the list would be considered disproof. Note that Ohio's proposal, forcing banks to offer for sale, does what I suggested - it puts things on the market. Note that banks walk away because they let the real liabilities grow while they kept thinking that their book value mattered. Wipe out the liabilities and stop them from growing, as the Ohio proposal does, and there's something there. More to the point, there's more there the sooner that happens. I'm sure that there are some places that won't get a bid even at 0 reserve and no liabilities. However, I see no reason to treat everything that way because most will get a bid. (I know folks who wanted to buy blocks of Detroit for the right price, but weren't willing to take the liabilities.)

yummyfajitas 16y ago

If the former owner downsizes, moving from a large home to a small one, the supply of housing goes up. And I don't consider lowering prices to be a problem. Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner. The new owners would be more likely engage in maintenance of the home (why fix the roof of a house you are going to be kicked out of) and the new owners will be people of better moral standing. Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet. It's possible that the downsides to leaving outweigh the upsides, but it's by no means certain. There are both upsides and downsides, and it's very far from obvious which way the balance goes.

MichaelSalib 16y ago
Leaving immediately would encourage the bank to sell the house as quickly as possible to a new owner. In many parts of their country, there is a large excess of supply, so it is unlikely that a quick sale is possible. Which means that the house will likely sit on the market for 6-12 months. In some areas, banks are walking away from properties they foreclosed upon, legally abandoning them. The responsibility for maintaining or demolishing the property then reverts back to the original mortgage holder, who often gets no notice and believed that they had nothing to do with the property since it was foreclosed. Under such circumstances, I think it can make sense for people to refuse to move out: if the house will continue to be an open ended obligation for you, you might as well at least get a place to live out of it. See this article for more information: http://www.cleveland.com/news/index.ssf/2009/07/bank_walkaways_from_foreclosed.html http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa... why fix the roof of a house you are going to be kicked out of Two reasons. (1) Because you don't like rain water poring over your head while sleeping in bed. No one wants to live in a house where rain water is poring on them. No one wants to live in a house where mold and mildew have taken root from pooling water. And no one wants to share a house with raccoons. (2) Homeowners often develop irrational attachments to the home that they "own"; that is why many people buy homes when doing so makes no economic sense. These irrational attachments may incentivize people to maintain homes when rational calculation suggests they should not. Remember, being a "good" homeowner is a key concept of many people's self-image. Doing things like fixing leaks and tending the yard may continue to matter to them even after they've decided that they're not paying another cent. Further, leaving immediately would force the bank to mark their assets to market, thereby making it more difficult for them to fool regulators and the public about the state of their balance sheet. I don't believe this claim is true. Can you cite anything justifying it? In many areas, foreclosure takes a long time because servicers and courts are overwhelmed with volume; this state of affairs benefits banks who can postpone marking their assets properly. I don't consider lowering prices to be a problem. Sorry; I misread your comment. Given how little evidence we have that this phenomena affects a significant number of people, I don't find claims that this will materially change market prices to be credible.
- yummyfajitas 16y ago
  Concerning bank abandonments, that's interesting. Obviously if the bank abandons the home, the homeowner can legitimately live there. As for fixing the roof simply because it makes the home uninhabitable, I don't buy it. Unless the fix were cheap, I suspect most people would probably just leave. Why spend $5,000 fixing a home you will be kicked out of, rather than just move out? Or instead of moving out, you could just put a bucket under the leak and move your bed, on the theory that you'll probably be kicked out before the leak gets that much worse. Regarding mark to market accounting, my understanding is that a mortgage is treated as a "held to maturity" asset, while a defaulted home is treated as an "available for sale" asset and must be marked to the market. Thus, the bank must mark the loss only when the home is foreclosed on (not sure when in the process this rule kicks in). And yes, it benefits banks at the expense of investors. Personally, I see value in preventing this.

anamax 16y ago

> If the former owners in question leave the houses they're occupying, then they'll go live somewhere else. > And leaving the current home they're in vacant will reduce its value. You're assuming that these houses will be left vacant. In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so? Yes, the "right price" is probably a lot less than what the bank is owed. They should take the loss for dumb lending.

MichaelSalib 16y ago
You're assuming that these houses will be left vacant. Many will be left vacant for some time. Foreclosure is a slow process, even when the mortgage holders are not fighting you every step of the way. In almost every case (outside Detroit) there are plenty of people who would be willing to pay for those houses at the right price. Why shouldn't we let them do so? According to the statistics compiled by CalculatedRisk, that seems unlikely [1]. Many housing markets (not just Detroit) are still very sluggish. There may be tons of buyers for properties in hip urban areas where most HNers live/work, but most foreclosures have been happening in suburban/exurban areas whose real estate markets are still in the toilet. The national housing market has a very large stock of uncleared inventory, so vacancy should be the default assumption until that inventory returns to normal. This article [2] suggests that you're wrong regarding homes in Ohio. If there were really "plenty of people who would be willing to pay for those houses at the right price", then I don't we'd be seeing banks walk away from foreclosed properties and abandon them. [1] http://www.calculatedriskblog.com/2010/05/existing-home-sales-inventory-increases.html http://www.calculatedriskblog.com/2010/05/existing-home-sale... [2] http://www.cleveland.com/news/index.ssf/2009/07/bank_walkaways_from_foreclosed.html http://www.cleveland.com/news/index.ssf/2009/07/bank_walkawa...
- anamax 16y ago
  The CalculatedRisk stats say that houses aren't moving at current prices. That says nothing about what they'd do at lower prices. Even if all that happens is "move up", things are better for the folks who got to move up. (And there's less net economic loss if we lose the inexpensive places than the more expensive ones.) More likely, you'll get smaller and more households, as the run-up to the burst had people living together for economic reasons. Since I said that Detroit wasn't an exhaustive list, it's curious that another member of the list would be considered disproof. Note that Ohio's proposal, forcing banks to offer for sale, does what I suggested - it puts things on the market. Note that banks walk away because they let the real liabilities grow while they kept thinking that their book value mattered. Wipe out the liabilities and stop them from growing, as the Ohio proposal does, and there's something there. More to the point, there's more there the sooner that happens. I'm sure that there are some places that won't get a bid even at 0 reserve and no liabilities. However, I see no reason to treat everything that way because most will get a bid. (I know folks who wanted to buy blocks of Detroit for the right price, but weren't willing to take the liabilities.)