Thursday, June 9, 2011

Does the Bank Prefer You Squat?

Many people stay in their homes for years without paying mortgage payments.  To the banks, this can be, well, convenient, for the time being.

This article on CNN talks about people who made horribly bad financial decisions (taking $600,000 of equity out of a $135,000 home, for example) and are now living, rent-free, in homes they cannot afford, and are waiting, sometimes years, to be foreclosed upon.

While this may seem like a bad situation for the banks, to some extent it is better than the alternative.   Homes that are occupied tend to stay in better shape - with the utilities on, the toilets flushed, etc.  A vacant home can be vandalized or otherwise end up falling apart.

And the market for foreclosed homes is saturated.  Keeping more stock off the market is not a bad thing for the banks, at least for the present time.

So, if they let a homeowner (or soon-to-be former homeowner) stay in the home, it keeps the home off the housing inventory and avoids having to maintain a house that is vacant.

It is an old saw in the Real Estate business that a bank-owned property depreciates 10% for every year a bank holds it.  Banks are poor property managers and in most cases would rather sell a property cheaply than hang onto it.   But selling properties cheaply degrades the value of the rest of their portfolio, which in turn makes their balance sheet look bad.

Worse yet, when they unload a foreclosure for cheap, it brings down the comparable sales prices for a neighborhood, forcing yet another homeowner "underwater" and at risk for foreclosure as well.  It is a vicious circle.

So, I wonder if one reason the banks are not in a hurry to toss people out of their homes (which causes bad press as well) is that it really works to their advantage to have a "free caretaker" living in the home in the interim.

Of course, this just pisses the rest of us, who are making mortgage payments, off.

NOTE:  See my posting on Mortgage Fraud.    One way to commit mortgage fraud is to put a person in a house (usually a person who owes the Mafia money or a "favor"), force them to take out a home equity loan and give the cash over to the Mob as payment, and then tell them "good luck!"

Some people who stopped making payments on homes and are still living in them may be participants - unwilling or not - in mortgage fraud scenarios.