The Department of Housing and Urban Development (HUD) wants to reduce the number of delinquent mortgages sold to hedge funds and other major corporations, according to Bloomberg. To accomplish this objective, HUD has implemented new regulations that favor local governments and nonprofits. The goal is to help delinquent borrowers stay in their houses. The assumptions:
- Private investors “rush” to foreclose to convert the properties to rentals or other more liquid assets.
- Nonprofits and local governments will be less likely to foreclose and more likely to keep current owners in their houses.
The “private investors” involved are usually not people (except under the erroneous definition of the “Citizens United” ruling). They are too-big-to-care banks and hedge funds that buy hundreds or thousands of troubled mortgages at a time. I know several private note buyers who operate legitimately and ethically. I would not want to tar them with the same brush as the corporate raiders.
People like us at Hermit Haus try help these distressed homeowners salvage what’s left of their credit by buying their houses (sometime subject to the existing mortgage, sometimes not) before the house goes to foreclosure. We occasionally buy at foreclosure auctions, but by then the damage has been done, and it’s down to the numbers.
Nonprofits and possibly local governments will probably be less likely to foreclose than the hedge funds. One question is can these institutions raise the money they need to accomplish HUD’s goal. If they can’t, the delinquent mortgages will be offered to the corporations a couple of months down the road. It would be good if they could take possession of title and use the houses to provide low- or moderate-income housing. The latter could bring needed capital into financially distressed areas.
The other question is what will keeping distressed buyers in their houses accomplish? Putting on my Nostradamus hat, I foresee four possibilities, depending on the reasons for the homeowners’ distress:
- People who suffer from payment shock—having payments that go up because of the increased price of taxes, insurance, or interest (in adjustable rate mortgages) beyond their capability to pay—may be able to renegotiate their principle or interest rates to bring their payments down to something they can afford. I believe this will be good for the homeowners and the economy as a whole.
- People who get into trouble because of job loss or a healthcare crisis (which often results in the loss of a job and medical insurance) may be able to stay in their houses for a while longer, maybe even permanently as a result of a governmental or charitable purchase. Whether or not they would be able to afford to maintain their properties in a livable condition remains to be seen. Many of the houses we purchase are “unlivable” because the owners couldn’t afford or perform upkeep. This results in people living in some truly horrid conditions. I’ve seen toilets that haven’t worked in years. (You can’t un-see that!) Whether or not this outcome would really be beneficial to the people involved and the economy depends on the actions of the charities and local governments. Will they be able step up to the additional costs of upkeep of an individual’s home? In the case of local governments, will their constituents even allow them to do so?
- People who make bad financial decisions will continue to make them. Additional bad decisions may or may not lead to an eventual foreclosure. I talked to one person facing foreclosure who believed it would be possible to win a third set of concessions from their lender. It wasn’t. In this case, the concessions only deferred the inevitable, and the person was well and truly surprised when the lender auctioned off their home.
- People who are gaming the system will continue to exploit that system. I’ve often said—so often that Sue Ann is tired of hearing it—that human beings can’t invent a system that other human beings can’t corrupt.
Now for the question many of you have been waiting for: how will these changes affect investors like Hermit Haus? I don’t believe the will have any significant effect. Our business model is to intervene before foreclosure or to pick up the pieces afterward. We buy houses, not mortgages. When we buy houses from people facing foreclosure, we try to find creative ways to help them start over; we don’t just put them on the street.
The truth remains, that if you can’t afford your house, if you can’t afford the upkeep on your house, if you’re facing foreclosure or bankruptcy, we are likely to be your best option. Call us. We’ll try to help.