Could Foreclosures Actually be the Best Solution?

by Florida's #1 Mortgage Planner on February 4, 2009

Could Foreclosures Actually be the Best Solution? That could be one of the most intriguing, not to mention controversial, questions of the day.  Congress and the rest of the government, especially president Barack Obama, believe that it is not the best solution and that everything, no matter the cost, should be done to minimize foreclosures.  In other words, they are willing to sacrifice the many to save the few.

Don’t get me wrong, it sucks that people have to go through foreclosure, just like it sucks that a large percentage of American homeowners are upside down, owing more than their home is worth.  The problem is that most foreclosures these days are happening to those whom deserve it.  You heard me right, they deserve it.  They likely have bought more home than they should have, over-leveraged themselves to get into the home, or simply didn’t plan for the worse.  Creative financing is generally not the problem, nor mortgage professionals whom put them in those programs.  Sure, there are some exceptions, but not the norm. 

We can lay blame on a number of factors, much of which stemmed from our government to begin with.  Other factors, and those which are more likely the causes of foreclosures, stem from the way Americans handle their debts, including using their home as an ATM machine and wasting away their equity instead of investing it.  The bottom line is, no matter what got them to the point of facing foreclosure, allowing foreclosures versus the government “salvation” programs are likely the best solution and the quickest to get through the problem.

How can allowing a family to be kicked out of their home due to foreclosure be the best solution, even if undeserved?

When we look at the facts, we see Americans utilizing their homes as another method to utilize credit to purchase depreciable assets in their efforts to “keep up with the Jones'”.  Having homes on the household balance sheet allowed them to take on more debt than they should have, not to mention inflating home prices far beyond their true value.  Now, with home values crashing down and homeowners carrying large debt loads and little savings, their net worth’s’ are now negative.  Foreclosures would allow them to write off that debt and bring their net worth closer to the zero mark, if not slightly positive.

I am not advocating that anyone whom can pay their monthly payments and are upside down should go into foreclosure, nor be allowed to do so.  What I am saying is that allowing those whom are facing foreclosure to go through it anyway and not having the government try to “fix” the mess, would do more to help them than to keep them trapped in a home they can’t really afford anyway.  And let’s face it, while foreclosures amount to millions of homes lost, they are a small percentage of homeowners, so why make everyone, including non-homeowners pay for saving the few?

Allowing foreclosures will actually help the credit markets as well.  Some homeowners may be able to get loan modifications completed, but even most of those end up facing foreclosure down the road and with the number of scams out there, it is difficult at best to not waste their money.  The complications with loan modifications especially come about when their are two or more liens on a property, rendering the more junior ones worthless.  Since the lien is worthless, there is no incentive for that lienholder to do a modification, tying up the homeowner’s ability to do so.  In a foreclosure, the slate is wiped clean, speeding up the process versus delaying the inevitable.

As for market recovery, foreclosures will aide in speeding the process.  By allowing properties owned by the financially weak to move into the hands of the financially strong, the market can begin to sustain itself again.  Eventually, those whom were foreclosed upon will learn from their mistakes and be the buyers of the future, only this time in a better financial position, thus keeping the markets solid for a long time to come.

Homeowners that are facing foreclosure have an opportunity to learn and develop better financial habits, especially when it comes to overextending themselves.  I wonder how most homeowners whom have been foreclosed upon would answer these questions…

Do you feel sorry or are you relieved?

Has your stress level gone down?

Did you learn something and are you improving yourself as a result?

The government needs to stop the insanity, providing archaic attempts to solve the housing crisis.  If we look at history, government interactions do nothing but slow the process of recovery down and cost taxpayers exuberant amounts of money.  Again, the actions by our government in the form of “stimulus packages” is doing nothing for the greater good, merely bringing increased sacrifices to the multitudes in a vain attempt to save a few that likely would be better off without any assistance.

{ 4 comments… read them below or add one }

kathy February 5, 2009 at 10:06 am

I agree with some of your statement but the fact is people are loosing their jobs and were finacially stable when they bought them. Greed is what killed the economy……also its not going to be fun trying to rent after a forclosure since now your credit score decides on if someone will rent to you or even employ you so how can it be better. Greed is making people street people

Rain March 9, 2009 at 3:16 pm

I have learned, that many people today go about arranging their rental place, before they hit the forclosure status.

Steve April 4, 2009 at 7:17 am

I agree with Kathy. I had a decent job for 8 years that gave me the confidence to buy a condo in 2006. Last year my company was sold to another company and I lost my job in December. Now I cannot make my mortgage payments and I might have to go into foreclosure. This is my only house. I always planned for the future, unemployment & a savings account that every month becomes smaller has been what have kept me afloat all these months. But I have had to decide between paying my mortgage or putting food in the table and other basic necessities. I have been aggresively looking for another job but no luck so far just 3 interviews and no offers in 4 months.

Florida's #1 Mortgage Planner June 4, 2009 at 5:04 pm

@Kathy – I know there are some out there that lost their jobs, divorced, etc. These were normal reasons people were foreclosed upon in the past and they were never helped, so why should we change things now? I know that sounds cold-hearted, but reality is reality. And I agree that greed is what brought us here, but that greed is spread across the whole spectrum from lender right on down to homeowner.

@Rain – You just answered the problem that Kathy eluded to, the fact that renting becomes harder with poor credit as well.

@Steve – Your situation is not unlike thousands, if not hundreds of thousands, of others and I can sympathize somewhat (I was furloughed from my airline job for two years). It isn’t easy by any means, but going through foreclosure may actually prove the most beneficial solution over time. Sure, it screws up your credit for a while, but it also lifts a major burden.

Again, I am not advocating foreclosures and I think you should do what you can to avoid it, but if it is going to happen, face facts and plan ahead to move forward in your life. You shouldn’t simply rely on the government to come to your rescue.

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