Foreclosures: Part of the Problem or the Solution?

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In this past weekend’s edition of The Wall Street Journal, opinion writer Ramsey Su argues that the government should not step in to prevent foreclosures, which he believes are the free market’s way of dealing with the current real estate crisis. By not allowing the market to deal with its own problems, Su argues that the government would be creating “a generation of mortgage slaves.”

What is the market telling us? Dataquick recently released December sales data for Southern California, once the hotbed of speculative excesses supported by nontraditional financing. Foreclosures now dominate sales. Prices are down. Sales volume is up. New home construction is down. These are beautiful textbook illustrations of supply and demand driving price and market equilibrium.

It seems Su is not alone in this opinion. In an interview with Memphis native Sarah Lacy on the Yahoo! Finance Tech Ticker yesterday, investor Paul Kedrosky agreed with Su and cited California as an example of free-market forces at work:

Kedrosky cites California as an example: Real estate prices fell so hard, so fast here that a lot of the foreclosure protection programs didn’t get a chance to work. And, as a result, prices have bottomed out and property is starting to move again.

So should the government work to prevent foreclosures, or will that just prolong the pain?

Posted by Scott Sherrin at 3:16 pm

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3 Responses to “Foreclosures: Part of the Problem or the Solution?”

  1. Terry Roach Says:

    We went through the same thing in 1980-1982. The government did just the opposite of what is going on now. Rather than bail out the housing industry, they RAISED interest rates (to kill inflation) and by 1983 rates were back down in single digits, and the housing market recovered nicely.

  2. Real Estate Appraiser Says:

    Many would agree that the current foreclosure blitz is not the same as 1980-82. Only the uninformed would see the current crisis as ‘correction’ of a housing bubble. Houses that foreclosed, not sold on the steps, once went into the REO hopper as bank-owned properties re-marketed at modest discounts. Not so in the current market. Lenders’ representatives bid on the courthouse steps to protect their liens, often at full price, to write off bad debt only to dump those properties back on the market at liquidation prices, either at auction or through agency sales. The resulting sales, often below reproduction costs, rapidly erode normal arms-length sales values. If increasing foreclosures are not limited soon, market value will be determined solely from liquidated or depressed sales, exacerbating the problem.

    Appraisers use normal arms-length sales to determine value but what happens when 60-80% of sales are bank or foreclosure sales? Does this become market value? We see results of this now in several neighborhoods in Memphis, particularly in developments where existing homeowners compete with builders’ markdowns or auctions of unsold new construction. Existing homeowners in these partially completed developments can neither re-finance nor sell their homes for the price originally paid. All they can do is walk away, perpetuating the foreclosure problem as values continue to plummet in their subdivision. Exploited neighborhoods of rehabilitated houses, marketed on sub-prime loans are equally depressed.

    Re-financing hit an all time high in 2006-07 as homeowners at all income levels accessed inflated equity under an impression that value would continue to escalate. With the discovery of a product, based on a flawed model structured to sell those mortgages, a global economic crash surprised everyone.

    Many who purchased or refinanced now find access to home mortgage credit unavailable as qualifications tighten. As job loss increases, more foreclosures feed a deadly spiral. Immediate action is needed to mitigate the resulting damage. If initiated quickly, mandatory modification combined with a moratorium on foreclosures may help those who can still benefit. The problem originated with the housing industry. It will not begin to resolve until housing is stabilized.

  3. Shirley Vosse Says:

    Su is correct that the government would be creating “a generation of mortgage slaves.” More important,
    government intervention-takeover is the first step toward the death of the real estate industry including NAR.

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