Foreclosure Wickedness

Recently, CBS News ran a story about foreclosures. Not really a new topic given the current economic environment.

But reporter John Blackwell took a look at wealthy people in foreclosure. These particular homeowners are people who own million dollar homes and are able to pay the mortgage yet make a "business decision" and choose not to pay what the mortgage holder.

The reporter interviewed a guy who said that his house was worth $400,000 less than what he owed and it didn't make sense for him to sink money into a bad investment even though he could afford the $10,000 monthly mortgage payment. The homeowner said that the bank could take the loss.

Banks are even more reluctant to foreclose on million dollar homes since these homes cost a lot just to keep in sale-able shape. And a foreclosed million dollar plus home brings down the values of the neighborhood. One estimate is that one in twelve homes nationwide is in foreclosure and the rate is one in seven homes valued over a million dollars.

I want to be really clear that I am not talking about the average homeowner facing foreclosure due to job loss or other reasons. And there have been plenty of reports of banks abusing the foreclosure process. A lot of people are in desperate financial situations and foreclosure is the only way out for many people. Again: I am not talking about the average person facing foreclosure today.

But these are the people who are deliberately not paying their mortgages when they are able to pay.

In Psalm 37:21 it says: "The wicked borrows and does not repay, but the righteous is gracious and giving." (Holman Christian Standard Bible). I looked at a whole bunch of translations and I couldn't find a one that was any less clear on this subject.

Borrowing and not repaying when you have the ability to repay is wickedness. There is no out for making a "bad investment". This kind of behavior is not worthy of praise, it is only worthy of condemnation.

And I don't think I would trust someone who I knew pulled this sort of stunt. In anything...

Mortgage Meltdown

Actions often have unintended consequences.

The Federal Reserve Bank of New York just issued a report that examined the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This Act had some interesting consequences as reported on by Dan Margolies of the Kansas City Star.

In a nutshell, prior to the Act in 2005, someone facing severe financial problems could declare bankruptcy, wipe out their consumer debt (credit cards, etc) and then use the cash to get caught up on their home. The goal of the Act was to force "better off" borrowers to pay off all the debts and not escape through filing Chapter 7. Now they are forced to file Chapter 13 which means that they are much more likely to lose their home.

Bankruptcies did go down at first but I think this was probably due to the rise right prior to the Acts implementation of people wanting to beat the deadline for filing under the old law.

Currently this Act is contributing to the large rise in foreclosures. And it is not having an effect on the "high-income deadbeats", it is impacting the average income American most of all. These are the people who are most likely to be so far in over their heads that they can not pay their debts and their house value has fallen so that they have negative equity in their homes.

I don't like debt (especially consumer debt) in the first place and I firmly believe that we should pay our debts whether they are put aside due to bankruptcy or not. But this is a good example of a government imposed solution that caused more problems than it cured. Granted it is not the only reason the country is in the economic mess that it is in right now but it is contributing to the slow recovery in housing markets.

But now a proposal is gaining steam in financial and political circles to let bankruptcy courts alter the terms of a mortgage to keep people in their homes.

I wonder what problems this new proposal will cause if it is enacted?

As the article points out: "it is one of the Ten Commandments that those shalt not alter the terms of a mortgage."

Rather than try and fix the bad Act with a band aid, maybe the new law should just be scrapped and the old bankruptcy laws put back in place.

Of course, when has Congress ever gone for less regulation?

I strongly doubt the cure will work as cleanly as those who want this new revision expect.