Posted by
Andrews on Friday, August 22, 2008 1:02:17 PM
Recently I have noticed a second count accompanying the "dead in Iraq" number the press loves, that is foreclosure count. Both serve the same purpose, to show the escalating failure of the Bush administration, at least that is how the press sees it, and, as the conflict in Iraq calms down, the ever increasing foreclosure count has come to work better than the death count, as foreclosures continue to rise.
Now, I won't go into the causes of the "
housing crisis" and "
subprime crisis", as I have written extensively on both. Yes, the government is to blame, but none of the programs or policies which caused them were unique to Bush, nor did they start with the Bush administration.
What I do want to discuss is how absolutely misleading this number is. While the press presents it as "residential foreclosures" that is true only in the sense that they are properties zoned residential. While the press gives the impression that each of these foreclosures represents an individual losing his or her home, that is simply not the truth.
What the press neglects is that the combination of ever escalating housing prices and the existence of loans with token down payments put property speculation within the reach of most of the middle class, and, thanks to a parade of televised "flipping" shows, many in the middle class decided it was a route to easy money. And for some it was. But when the crash came, a lot of these investors were left holding property they could not sell, but could not afford to carry until conditions improved.
Just imagine this hypothetical scenario. You have been involve din property speculation for some time and now come across a house selling for $500,000. It is worth $600,000 in the present market, maybe more with a few thousand dollars of improvements, so it seems a good risk. You lack capital for both a down payment and improvements, so you get an interest only loan with only $10,000 down. Then the market sours. The house is worth maybe $400,000. You continue to make the interest-only payments, but the market doesn't recover. There is no sense in making improvements, as you still will not even break even.
What is the sensible thing to do? Sell the house and take a $100,000 loss, plus all the payments and your $10,000 down payment? Or simply walk away, let the bank take the house, and just lose $10,000 plus the payments you have made?
And that is the truth in many of these foreclosures. Instead of evil banks driving families from their homes, it is the bank which is losing. Thanks to the government pressing bad lending practices, interest rates dropping to absurd lows, and lenders making loans with inadequate down payments, many of these foreclosures represent losses to the banks more than the borrowers, who are basically sticking the banks with losses that should rightly be theirs.
Actually, that is the great lie of the entire housing story, the line that banks are somehow getting rich on foreclosures. With prices dropping, the banks ar enot making money on foreclosures. When they take a house, it is a last resort move, they are acting to cut their losses, to ensure they don't lose any more. They are not making a fortune on each house, most often they are taking a loss. Banks do not get rich off foreclosures and failed loans. No matter how often politicians and other damagogues say so.
You would hope those in public office would know better. Or, if they do know better, that they would be honest about it. It is sad that it falls to those of us who have not bought into the rhetoric to correct their self-serving tales of greedy bankers. Is there not one politician out there with the backbone to tell us the truth, that bankers, borrowers, everyone was harmed by the fiscal irresponsibility encouraged by government policies?
Shouldn't there be at least one "leader" out there who can tell the truth?
UPDATE
When I say the government "is to blame", I mean in as much as there is any blame at all. For example, when I say "housing crisis" I tend to think not of the dropping prices that concern the press and politicians, but the artificially inflated prices preceding it. A lot of what is being called a crisis is really an adjustment which is long overdue. But if you read my earlier writing you will find this much better described than I can do in this short postscript.