Lest We Forget: How The Banks Are REALLY Screwing Us In The Foreclosure Mess
Everyone, and I mean everyone you ought to be reading, has been working through the mechanics and the meaning of the foreclosure fraud being performed on the nation by our biggest banks. For a quick overview, head on over to Rortybomb, just read your way down, and check out Naked Capitalism as well. I promise you, once you start down the trail of links, you’ll have days of infuriating study ahead of you.
But for all the justified outrage at the simple disdain for the concept of property rights and the rule of law* there’s something else being missed here, something that astute observers have commented on, but that seems to be a bit obscured as we all, understandably, rubberneck in horror at the trainwreck that the major banks have made of the foreclosure process.
And that is that the entire foreclosure endeavor is in fact a huge imposed cost on American homeowners and our economy; it almost certainly runs against the long-term interests of the financial system as whole, whatever the incentives may be for individual companies (and it may well be a long term fail for many of the short-term beneficiaries as well). Foreclosure as it is being practiced now is likely to be a net negative for homeowners now, to the point that subsidizing in some way those who got into trouble is economically rational, even if it might be galling to those who’ve paid up and gone about their business.
At least, that’s how I read this paper by John Campbell and Stefanio Giglio and my MIT colleague Parag Pathak, “Forced Sales and House Prices.” It uses an ingenious trick to isolate the implications of forced foreclosure sales for prices of both the foreclosed home and nearby properties by tracking such sales in comparison with other forced sales, like those that follow the death of an owner.
Their results are of a sort fairly common in applied or empirical economics: quantifications of the seemingly obvious. Foreclosed properties sell at a deep discount to their local markets and in doing so, drive down the values and sales prices of nearby homes. Money quote:
We ﬁnd that foreclosures predict lower prices for houses located less than 0.25 mile, and particularly less than 0.1 mile away. Although foreclosures and prices are both endogenous variables, the fact that foreclosures lead prices at such short distances does reinforce the concern that foreclosures have negative external eﬀects in the housing market. Our preferred estimate of the spillover eﬀect suggests that each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%.
Not the sexiest prose in the history of styli and tablets, I’ll admit, but the point is clear enough: this study found that foreclosures sell at 27% discount to the unforced sale price, and that the loss to the seller (the foreclosing banks) is compounded by a loss to every homeowner in the neighborhood.
As foreclosures mount, that loss grows — and, the study found, such effects are often concentrated in lower-priced neighborhoods, which is to say that when scum like those dispossessing Kirk use fraud and deceit (advising him to skip a payment to start up the loan modification process, only to use the action taken on that advice to begin the process of seizing Kirk’s home) — and thus maximize their short term return by dragging out a foreclosure process, they are imposing a charge on every homeowner and every bank lending on homes in Kirk’s neighborhood.
Expand your view to the country as a whole and you see that over the last decade, the banks lent recklessly, leveraged insanely, and then resorted to a range of unsavory-to-illegal manouvers to limit exposure to the consequences of decisions that, taken altogether, effectively bankrupted the US and much of the world’s financial system.
They have received enormous sums to prevent an overt bankruptcy, and in response have pursued tactics that do untold harm to thousands, perhaps millions of American citizens as they foreclose on the properties they recklessly exposed themselves to over the last several years. As they pursue those foreclosures, those banks have both deceitfully tripped some homeowners into default (see Kirk, above) while performing multiple frauds and failures to proceed in a legal fashion in a sequence of actions that looks suspiciously like a fee-maximizing game of delay.
In so doing our financial lords and masters harm us all by slashing yet further the value not only of homes in default, but those of hundreds of thousands, maybe millions of homeowners who had nothing to do with either the bad loans in the first place or the foreclosure fiasco now taking place. This is effectively not so much as a tax as a taking — one that reduces the wealth of millions of Americans who don’t have scratch to spare thank you very much
Duncan Black (can’t find the link in haste…will try to dig it up) among many others have been screaming for years that the appropriate policy from both a social and an economic point of view has been mortgage cramdown — I’d add you’d need a (non-kangaroo) court-supervised dispositions of the properties too far underwater to permit any reasonable mortage adjustment to save the day. But whatever the details, there is a growing body of work that suggests it would be cheaper for our country, if not for an individual bank or holder of an ill-begotten MBS, to keep people in and maintaining their homes while not imposing what amounts to a huge fine on every nearby homeowner who has kept their property out of default.
And that is not just this DFH talking. This is the clear implication (expressed in a rather different language than the authors of the original work would use, no doubt) of the soberest of sources, two Harvard and one MIT economist, as respectable a set of oracles as you could possibly hope to find.**
One last thought: There are those (as noted below — see the Wall St. Journal) who argue that the foreclosure documentation mess is merely a matter of trickery and delay on the part of those who shouldn’t have bought houses in the first place, and that,in the words of the Journal, “the bigger damage here is to the housing market, which desperately needs to find a bottom by clearing excess inventory and working through foreclosures as rapidly as possible…”
If, however, you live in the reality based community, and not in the ideological bubble chamber that is the Journal’s — and the modern GOP’s — true home, then you would read things like the paper cited above, and maybe think twice before suggesting that the best outcome for America (and maybe the banks too, in fact) is to accelerate a process that destroys value for homeowners who are not in arrears, in the process of depressing the country’s real estate market for years, at least. Just a thought, you know.
*One of the weirdest things about the whole housing mess to me has been the wholesale abandonment by the alleged “conservatives” among us of any commitment to — or even basic understanding of — the idea of property rights, contract law, and the roles and duties of parties to contracts governing real property. We have McArdle outraged that folks who got their sums wrong walk away from mortgages — as if the banks did not have a full, contractually specified recourse, to take possession of property they were supposed to have exercised proper caution in evaluating. We have the Wall St. Journal dismissing as mere sloppy paperwork sustained, widespread and long-lasting fraud by the major banks in their attempt to pursue contractual remedies to which they are not entitled. It seems to me that there is nothing more likely to produce a long-term threat to the American real estate market than confirming the belief that one of the biggest risks in home purchasing is that your lending will f**k you over. Yet the Wall St. Journal thinks it appropriate to dismiss criminal conspiracies by banks as mere high spirits. Astonishing — but worth remembering the next time that paper opines on the sanctity and infallibility of “free” markets.
**I hope it is obvious, and if it is not, let me make it so here: every interpretative statement and every conclusion not drawn from a direct quote from Campbell, Giglio and Pathak is mine and mine alone. If I’ve made analytical errors, they are mine, not theirs; if you dispute my characterizations or conclusions, your beef is with me, not them. To give you just another taste of their reasoning however, here’s one more passage from the concluding section of the paper cited above:
Our results cannot be deﬁnitive on the causality from foreclosures to house prices, but the combination of timing eﬀects (stronger from lagged foreclosures than from future foreclosures) and geographical eﬀects (stronger at extremely short distances) suggests that there is reason to be concerned about spillovers from foreclosures to neighboring houses…
The authors are cautious writers. They make it clear, however, and they quantify their reasoning, that foreclosure does damage to the sales price of both the defaulted property and the neighborhood. As I say, a quantified glimpse of the obvious — but it is often necessary to prove what you know, both so you can say so with authority, and because every now and then the obvious is false. Just not this time.
Images: Winslow Homer, “The Camp Fire,” 1877-78