With all the buzz surrounding the housing bill, I haven't had time to write about a recent tragic story that should help us all realize what's really at stake in the current housing crisis.
Last week, in Taunton, Massachusetts, near Boston, a woman shot herself about 90 minutes before her home went up for auction. She sent her lender a note stating that by the time the lender foreclosed, she would be dead.
She left behind a husband and son.
Because the woman handled the family's finances, her husband did not know about the foreclosure. The woman was carrying the burden, stress, and shame of her family's money problems on her own.
She tried to save her home by filing for bankruptcy under Chapter 13 three separate times, but her petitions were dismissed.
This tragedy is a metaphor for what's happening to our nation, and our communities, as a result of the current housing slump. Across the country, communities are dying, and once active neighborhoods and cities are becoming ghost towns. As home values continue to decline, and homeowner interest rates continue to rise, there's a real and palpable feeling of despair setting in. Any banker, politician, or pundit out there who can't feel this is out of touch with the American public. Ignoring the public is fraught with peril: after all, regular people living their daily lives is what drives 70% of our economy.
So what do we do now? There are only a few ways that a problem this large gets fixed: 1) incomes rise enough so that the average unit of housing becomes a lower multiple of the average household annual income - this will take years to happen, even with falling home prices, because real income has been flat or falling for the past decade; 2) something big happens in the economy to make regular people feel wealthier, like the dot com bubble of the late 90s, or the housing bubble - well, I think we can agree that we should steer clear of another bubble market as a fix; or 3) all the players agree to take some of the sting of the current mess, roll up their sleeves, and work together for a long-term fix that minimizes foreclosure risk for homeowners.
The third option is commonplace in commercial real estate loans - there are even lawyers who specialize in commercial loan workouts for commercial property owners and developers who get caught short by a turn in the real estate cycle. Unfortunately, despite banking industry lip service in the media, the workout option is far too uncommon in residential loans. The reason is simple: a single commercial loan commonly ties up millions of lender dollars in reserve (money set aside that the lender cannot reinvest) for a long time, because of how long it takes to resell a large commercial property. But a single residential loan gone bad does not put a big dent in the lender's capacity to do business.
Until now.
Lenders are taking back so many properties that their reserves should be getting to the point that residential workouts make business sense. The real question is whether the lenders are willing to roll up their sleeves and work with homeowners the way they already work with commercial property owners.
Let's hope so.
