Wednesday, October 10, 2007

Interesting Article: How Foreclosures Can Affect You

How Foreclosures Can Affect You 10/10/2007 7:07:51 PM
Most people think of their home as an investment – not merely a shelter from the cold. But that is merely an illusion. As more homeowners with subprime mortgages and adjustable-rate mortgages enter into foreclosure and lose their homes, we are beginning to see how these unfortunate circumstances affect all homeowners. In his recent Elliott Wave Theorist, Bob Prechter describes what happens when banks decide to sell foreclosed home for cents on the dollar.

Excerpted from The Elliott Wave Theorist by Bob Prechter, September 2007
Now ask yourself again, would the Fed want to own mortgages on homes it would likely have to re-possess and then refurbish, re-sell or rent out? No way. Of course, the headaches [of holding foreclosed properties] lead banks to contemplate rapid sales to clean the books. Such decisions have implications for the entire market, even to the point of devastating the poor schlubs who can afford their mortgages:

“Dumping foreclosed properties back out on the market in a desperate manner actually worsens the situation because all your other borrowers, the ones who are paying their mortgages on time, are going to see their equity disappear as the fire-sale prices drag down everyone’s values,” HSH’s Gumbinger said.

Can you see in these words the seeds of another aspect to the downward spiral? As house prices fall, financially sound mortgage payers will find that their mortgage payments constitute a higher and higher percentage of the value of the house, becoming ridiculously high. Then when the economy contracts, even these conscientious payers may find themselves out of a job and unable to continue the mortgage payments, even if most of the house is paid for. They were responsible people (within their limits of knowledge), but they will lose their homes anyway.

A home may seem to have some investment advantages, but all of them are artificial, having been created by government: (1) you get a tax break, and (2) prices tend to rise through inflation. But any purchase or investment that the government supports artificially will eventually hurt the intended beneficiaries. Thanks to government subsidies and inflation, the housing market grew disproportionately, and now too many people are stuck in homes they cannot afford. Thanks to government subsidies, too many people own gas-guzzling SUVs weighing over 6,000 pounds, the size above which the government offered tax breaks, and now they are stuck with exorbitant gasoline costs. Thanks to government subsidies, some people are now investing in corn to make ethanol. Do you think that gambit will end any better?

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