Fairbault Daily News, online:
By Jim Hammerand
Posted: Saturday, July 19, 2008 11:45 pm
More residents are finding Sheriff’s Deputies at their doors with foreclosure papers as the housing turmoil in Rice County is on pace to shatter projections just halfway through the year.
The Rice County Sheriff’s Department, tasked with delivering notices and holding foreclosure sales, said this week that 203 mortgages in the county had been foreclosed on as of July 17, a pace that will soon overtake the tally for all of 2007 of 235.
Reporter Hammerand in the full article indicates the problem banks face. Homeowner plight is well understood. However, a bank buying at its own mortgage foreclosure sale has several problems, certainly for the short-term in a depressed housing market. This is particularly so if a mortgage is abandoned because the present market value is lower than the mortgage amount, a negative equity situation, which can arise if the market drops badly and a maximal mortgage amount was financed. The situation can be worsened if bad appraisal data was relied upon, say 110% above then market value because of error, and the bank financed 80% of that. Then if the bank buys at its foreclosure sale and present quick-turnaround yield is less than the balance owed, the bank can lose - with greater loss arising from either a highly depressed market or a bank chasing as quick a cash-out as feasible. If many foreclosures are involved the pressure from regulators and sound banking principles is to not hold too big an illiquid asset set, i.e., to go for the quick sales.
And my understanding is whether a foreclosure is done judicially or nonjudicially, there is a redemption period involving junior lien holder rights, even if the foreclosure is done in a way that forecloses occupancy rights if the terms of the mortgage included an occupancy right waiver/forefeiture provision.
Some banker reading this more familiar with the procedures can correct me if I am wrong. But basically, there is a time frame going against immediate cashing out a foreclosed situation. I realize the nonjudicial foreclosure process is almost universally used, because time in litigation can means years instead of months.
So, small local banks suffer, home buyers suffer, and Bear Stearns suffered.
So far, only Bear Stearns got a bailout from Uncle Sam, from the Federal Reserve actually, which is not exactly Uncle Sam. It is a banker's bank, with federal oversight but private ownership. Yet it manages and prints everybody's money and is answerable to Congress. The Fed propped things up so that the investment bank bone picker that took the operation over was less at risk.
Fairbault is used as an example. It shows, it is a statewide phenomenon.
The focal question is what can be done to lessen the suffering? Or, more accurately, can government really do anything short of an extremely costly bailout for the banks and homeowners at risk? And then, should everyone's tax money be used to benefit a subpopulation that made bad risk taking decisions? Is that fair to everyone else?
The House Financial Services Committee, chaired by Barney Frank and with Minnesota's Michele Bachmann and Kieth Ellison as members, is wrestling with those questions at present. That is a federal level, nationwide viewpoint. The problem is national is scope. Minnesota alone, and its local jurisdictions are even less fit to do anything than the federal government. And there remain two key questions - the policy question of how far should the federal government go, and the implementation question of what effective means do they have to do anything short of either spending an awful lot to mop up, or spending little but putting rules in place aimed at making things better for mortgage lending practices in the future.
Answer for yourselves, should everyone pay to rescue bad risk taking by a subpopulation? That policy issue seems to be the heart of things. The people who did not bite off more than they could chew, or who were able to buy before the bubble got bad and have paid-off their homes - they were fortunate in timing, and prudent and frugal. They could have lived more comfortably short-term, but took their risks carefully and stayed within their means. Should their tax dollars go to rescue others who perhaps enjoyed themselves more instead of being as prudent?
Do you or your children want to pay higher taxes to subsidize now some family that bought too big a home, added a wing, and also bought a boat, several vehicles traded in frequently, and recreational motorized things and now is in a crunch? If not that, what about some mom and pop that remortgaged a home to help the kids out or to cover a medical cost, and now cannot meet payments? There is a range of causes for foreclosures.