Very Bad Debt

Yesterday the House passed legislation aimed to help 400,000 homeowners facing foreclosure and help shore up Fannie and Freddie.

Some of you have asked “Will this reduce the role of Short Sales?” Hardly!

First of all – the bill itself only attempts to reach about 400,000 of the some 3 million homeowners expected to lose their houses in the next year. There will still be 2,600,000 potential Short Sales – way more than every real estate agent and investor – if we all worked together to help every seller in need – could ever begin to handle.

Second – the bill’s provision are only applicable IF a lender CHOOSES to enter into a modification to allow the borrower to remain in the property AND IF the borrower desires to stay in the property. If a homeowner wants to stay in their home and there is a possibility to help them accomplish that goal – I can only hope that the homeowner succeeds in keeping their home – however they figure it out.

However, lenders have always been able to structure modifications with borrowers who wanted to stay in the house – but they haven’t. Modifications to keep homeowners in their houses has not stopped record foreclosures because the homeowners hit by the foreclosure crisis are largely in houses they can not afford even under modified terms.

Remember, a Short Sale is appropriate only if a Seller has decided to leave the house and sell. Therefore, a homeowner who wants to stay in the house and refinance is not a potential Short Sale candidate anyway.

Short Sales are appropriate tools to help a seller who has decided they cannot stay in the house and has concluded that it is time to leave. (Need help with the basics? Just ask for my FREE CD on Short Sale Basic and we’ll send it right out to you.) If a Seller can figure out a way to stay in the house themselves without a Short Sale, then more power to them.

Even if there is something in the government’s plan that does help a few homeowners stay in their houses, then this is also a good thing for all real estate professionals. A reduction in the number of Sellers loosing their houses will contribute to a healthier real estate market which in the end will be better for all real estate professionals.

However, as I have written previously, I do not think government can fix the housing crisis. The “crisis” we are experiencing is merely the market correcting itself from the over exuberance of a few years ago. It is the crisis and the correction itself that is the fix to the problem. And the pain experienced in the marketplace now is the symptom of a market healing itself.

The housing bill is a government bailout - period – no matter how you spin it. The sad reality is that it will largely bail out banks and not homeowners. It will be paid for by an increase in our government’s deficit spending. It seems the bill merely attempts to shift the costs of overextending and making bad housing decisions from individual homeowners to all taxpayers. By shifting the bad debt from lender’s poor lending decision to the nation’s deficit, the bill may fix the mortgage woe’s of a few by increasing the burden on the nation.