Foreclosure
About a week ago, I heard about how Bank of America was halting their foreclosures in multiple states. Now it seems that they have stopped foreclosing in all 50 states. This is called a moratorium, and in this case it means that Bank of America is not going to foreclose on many Americans’ homes even if they are not able to pay their mortgages. At first glace it may seem like they are doing this because they are being nice. Or perhaps they aren’t foreclosing on people because they can get more money by keeping people in their homes and accepting partial payment. But what I think is really going on is that Bank of America is attempting to preserve the housing market by plugging the gaping hole of rapid foreclosures. The one thing that we know about foreclosures is that the bank makes more money on a mortgage then they do if they have to sell a home after a foreclosure. The reason for this is because every time there is a foreclosure the bank needs to sell the property quickly in order to make money. Having it sit on the market does nothing for them. But the problem for the banks is that when there is a foreclosure in a neighborhood, there is a high probability that the value of other homes in the area will lose value. If you compound this with how there is a tremendous amount of unemployment and joblessness, then one can see how families may have trouble paying their mortgages. When people can’t pay their mortgages, they usually go into foreclosure and have to find a different housing solution.
But since Bank of America is temporarily halting Foreclosures, they are putting a stop on a chain reaction. This is actually in their favor. Because even though Bank of America will lose money from not selling properties that are foreclosed upon, they will protect the value of their other properties. I wouldn’t be surprised if other banks started to but the breaks on their foreclosures as well. I think the banks know something about the way the market is going that isn’t clear to the rest of us. They can probably see that even though the economy may look like it is stabilizing, the reality is that our ideal rate of financial growth is not sustainable.
One thing to think about is that if the value of a home drops, then it is more difficult to get good deals on refinancing.
Bank of America must see that they have too much a stake in the housing market to allow a foreclosure chain reaction to take place. So they are invariably protecting their assets by being lenient towards homeowners.
But while this is happening I am wondering how long Bank of America can maintain this halt on foreclosures. Because it doesn’t seem very clear when jobs are going to become widely available that will enable people to pay their mortgages. Also with the government going to vote again on the unemployment bill extension in November, there is an interesting issue that arises: Is the market heading toward a serious course correction?
From the looks of it, the government will probably pass the Unemployment extension in November. So it seems like we are being allowed to continue with our lifestyles for purpose. I think that purpose is to maintain consumption habits. If people stop consuming then this entire system is going to have a lot bigger problems than house devaluation.
-Tyler