Interesting piece on stealth local stimulus, at a blog called ForeclosureTruth:
"...we remain in housing limbo, with millions of homeowners underwater on their mortgages and unable, or unwilling to make their payments; yet with few being foreclosed, as lenders and the government desperately search for alternatives.... one effect of this housing limbo is the free rent we're effectively giving to those homeowners, and the contribution this free rent provides to the local economy.
When homeowners quit paying $1500 per month on their mortgage, that cash is available for other parts of the family budget. I've purchased 150+ foreclosures, and I can't remember a single homeowner that wasn't broke when it came time to move. Rather than saving, they're going out to dinner, subscribing to sports packages on TV, and buying iPhones or netbooks.... When I go out to dinner I look around and wonder - how many folks around me are out tonight thanks to a delayed foreclosure, and no mortgage payments."
Two thoughts: (1) Aren't you glad you sacrifice to pay your mortgage or rent every month? (2) With the overhang of foreclosures waiting out there, this might be a fine time to start a pawn shop chain, backed by an online resale platform.
1) One of the reasons why companies are stalling is because they stand to lose 60-80% off the worth of the house (plus you have to pay a company to sell it for you). It's actually cheaper for the company to lose a few months of mortgage (or to renegotiate) than it is to foreclose.
In normal times, this wouldn't happen so much. But these are not normal times, and if some companies foreclose on everyone, the company might have a liquidity problem. It's also better for YOU to keep your neighbors in their house. One foreclosure can lower the value of the whole block by 20-40%.
2) As I've mentioned before, a friend of mine sells foreclosed houses for a living. He is currently massively overbooked. Since we live in close proximity to the beach, most of those houses are secondary properties people bought while the market was high.
Still, a number of others are bought by people who were just living above their means. He is constantly amazed by the people who have been kicked out of their house with the TV's, stereo, game sytems still plugged in. By law, all the can do is throw them away. You would think they would go to the pawn shop...
Good points, Alchemist. Ultimately, most of these loans are going to go to foreclosure anyway. And no, it's not hard to see why banks and governments both want to put off the day of reckoning. And if it's a question of a month or 3 here or there, that's not such an issue.
The question is whether they'll try to do this beyond a couple of months, ensuring undependable balance sheets, property value shocks, and a resale market that's problematic for a long time. Pulling the band-aid off in 1mm increments doesn't make it hurt less - quite the contrary.
And yeah, you would think they'd go to a pawn shop. Guess it'll take time for that behaviour to establish itself. But the way we're going, I suspect there's still a good business model in it.
(1) Well, when we found ourselves with a big chunk of extra cash in 2005 from stocks, we paid off our mortgage, and our cars. On the one hand, it's annoying to see others slide. But on the other, we worry a lot less about the downturn because we have no debt and some money in the bank. If we were still paying the mortgage it would be far more aggravating.
So long as it's a short-term loss, they can pretend that it will materialize - the money owed is on the asset side of their books. Sure, they can't GET that money. But it allows them to have more money out for loans, which might be enough to keep the doors open another few months.
Taking a big hit on the asset books means that the bank immediately has to pull in other loans - and that's a dangerous rope to pull on, because times are tough all around, and if you yank on a business' credit line, it might come off in your hand as the business goes bankrupt. Congrats, you've just plowed under a productive enterprise, and now you've got TWO blocks of loans you won't be repaid on.
Nor can the banks easily sell the real estate assets they get through foreclosure. Not only are they typically in bad shape (people don't wash rental cars), but they're concentrated in markets with sharply falling housing prices. So either you go for the fire sale (and devalue a lot of other loans on your books, which does not help the problem) or you sit around while your properties don't move.
More to the point, though, are these people necessarily making bad financial decisions? If you have a $500k mortgage on a house that markets for $250k, wouldn't that be an excellent time to find someplace else to live for a few years? Sure, your credit will look ugly, but it doesn't make sense to spend an extra $1000/month on rent so that you'll save $3k every 5 years on your car payment. Frankly, that $250k represents more non-housing credit than most folks will ever be offered in the first place.
Mind you, as a renter, let it roll. The more that unpurchased housing stock builds up, the cheaper it'll be when I finally decide to get a house. I wouldn't be unhappy to see prices fall another 50% from here!
Lenders have put themselves in a trap of their own design and essentially their appears to be no way out for them.
These lenders at all costs brain washed people from time to time to dwell on these offers. Often, many are fooled with these free rent services and stuffs until they find themselves hanging with piles of debt on their shoulders. Sometimes, it's much better to get a low interest rate loan rather than believe in these kinds of advertisement. However, if this is for real then good for the people benefited from it.