Home buyers facing foreclosure are giving lenders an ultimatum: Pay up, or else you will get the house back trashed. Investors who buy foreclosures know that many properties are found in bad shape, often without appliances, light fixtures, and other items which came with the house. It is common for homeowners facing foreclosure to rip every saleable thing out of the house, then take their frustration out on whatever is left. However, homeowners and lenders are coming to a compromise. Lenders are paying homeowners hundreds, or even thousands, of dollars for turning in the home in good shape. Ultimately, this works out better for both parties, but I can’t help but think that something isn’t right with this picture.

Here is an excerpt from a Wall Street Journal article on the topic:

“The owner, a 43-year-old man with two children who spoke on the condition that his name not be used, says he bought the property in 1993 for $140,000. Three years ago, he says he had the house appraised for $440,000 and took out a $207,000 home-equity loan to pay off credit-card bills and buy his wife a new van. His initial payments were an affordable $1,800 a month.

He fell behind, however, after he went through a divorce and his landscaping business faltered, just as his interest rate was rising. The man worked out a payment plan with the bank and borrowed heavily from his father, but, including penalties, his monthly payments rose to $4,000, he says. After two months, he says, he ran out of money, and the bank foreclosed.”

When I look at this example, I feel it is hard to put any blame on the bank. This guy pulled all the equity from his house, spent the money, and then had some personal issues that left him in a vulnerable situation. The bank worked with him on a payment plan, but he still couldn’t make the payments, so the bank foreclosed. Out of good faith, the bank also made him an offer of $500 to leave the house in good condition. He proceeded to reject that offer as not enough, and forced the bank to pay him $2,800.

So not only is the bank going to lose money on this deal, because the home isn’t worth what is owed on it, but they are paying this guy $2,800—even though he still owes them thousands. What is wrong with this picture? I understand completely why it is happening, but come on...what kind of precedent are we setting?

Labels: foreclosures, real estate