The most dangerous problem with the housing crisis in 2008 was not the amount of debt. It was the feedback loop that was created by defaulting on that debt. Foreclosed homes naturally have a lower value than non-foreclosed homes. Homes are priced by looking at recent comparable home sales. If your neighbors to both your right and left have had their houses foreclosed on, the value of your home will go down. If the value of your home goes down too much, it becomes nearly impossible to refinance your mortgage (which was important due to all the crazy adjustable rate mortgages that were handed out in the preceding years). This leads to more and more foreclosures and worse and worse home values.
That feedback loop does not exist with unsecured debt. If your neighbors to both your right and left can't pay their student loan, the value of your education will not go down.
And with securitization of mortgages, original lender doesn't have skin in the game. The servicer has to follow the rules very tightly, so they will quickly go for foreclosure, it doesn't matter if you call them and say you just got a job offer so you can pay in a month. If loans were held on the balance sheet of the bank, you'd call up a rep at the bank and they'd work with you to figure something out. Foreclosure is the last resort for the lender because they want you paying interest, they don't want to deal with running and selling a house.
It sounds like the actual most dangerous problem was people financing homes on unsustainable lending terms, literally requiring the home value to go up so you could refinance before your ARM teaser rate expired.
Fault for that goes both ways, towards to people who took the loan and the people who gave the loan. The people who gave the loan knew a lot more about the specific details and risks, so I find it hard to blame the people who took the loan.
That is exactly why /those/ institutions should have 'defaulted' and gone in to orderly holding/liquidation. They are the experts that performed malpractice on society at large.
> Homes are priced by looking at recent comparable home sales. If your neighbors to both your right and left have had their houses foreclosed on, the value of your home will go down.
It does not work quite like that. If there are a lot of foreclosures in a neighbor the prices will come down because of the additional inventory. Appraisals though are supposed to look at comparable homes, and take into account if the homes were sold under duress. A house or two in the neighborhood that either was foreclosed on, or sold much lower because the owner needed out should not impact an appraisal very much. Those are one off deals and do not reflect the market as a whole.
> Homes are priced by looking at recent comparable home sales. If your neighbors to both your right and left have had their house foreclosed on, the value of your home will go down.
Surely the lower valuation on your home is incorrectly low, though? Or is there some actual reason why buyers would want it less?
It is a supply and demand problem. Your house is only worth what someone will pay for it. If the potential buyers have several cheaper foreclosed homes to buy instead of your home, the potential sale price of your home will go down
The banks use "comps" to figure out the maximum loan value. Assuming the housing nearby as similar, their actual sale price provides the price signals markets crave.
I don't think the statement you're quoting is correct, however, they do tend to have a lower value. Here are some reasons:
- Buying a foreclosed home is much more arduous due to bank processes, decreasing demand.
- Foreclosed homes tend to be in worse shape. The owners may not have had the means or desire to maintain after realizing they would eventually lose the home.
You forgot the incentives for the seller. A home sale is likely the biggest transaction that most people are ever involved in. A traditional seller is more likely to hold off for the right buyer or price. For a bank, it is just one of many transactions. They are less likely to hold out for a specific price and will be happy to sell for 90 cents on the dollar to simply move on to the next transaction.
>I don't think the statement you're quoting is correct, however, they do tend to have a lower value.
I am curious why you say that quoted section was incorrect when you seem to agree that the value of foreclosed homes is lower.
I thought "naturally have a lower value" implied that there is something about foreclosure itself that reduces the value of a home. I don't think this is true. Rather, I think that foreclosure is covariant with things that reduce the value of homes. So I wanted to clarify that point. That's what I meant by disagreeing with the quoted statement.
Ok, I guess that is just a question of semantics. I likely could have phrased it better but the underlying point still stands that an increase in foreclosed homes will lower the overall home value in an area for the reasons we both listed.
It also doesn't fit the real estate agents incentive structure so they don't show the foreclosed homes and thus less competition for purchase and thus lower price.
That feedback loop does not exist with unsecured debt. If your neighbors to both your right and left can't pay their student loan, the value of your education will not go down.