Foreclosures

[CCM08]

Is it wrong to profit by purchasing and reselling foreclosed real estate? Why, or why not?

 

[Mirror_Mirror]

Why would you think that it would be wrong?

 

[mapleoak]

Is it wrong to profit by purchasing and reselling foreclosed real estate? Why, or why not?

By nature of what a foreclosure is, the restoration of real estate to its rightful owner, there is nothing inherently immoral in the purchase of such real estate. Foreclosure is not the same as forcing a sale where one party has not defaulted on terms of contract. This would indeed be immoral.

 

[CCM08]

Why would you think that it would be wrong?

Profitting on the misfortune of others seems immoral to me, legal or not.

 

[CCM08]

By nature of what a foreclosure is, the restoration of real estate to its rightful owner, there is nothing inherently immoral in the purchase of such real estate. Foreclosure is not the same as forcing a sale where one party has not defaulted on terms of contract. This would indeed be immoral.

So anything that is legal is also moral?

 

[mapleoak]

So anything that is legal is also moral?

Not at all. In fact, depending on where you are talking about, it may or may not be legal. Through a lender, be it a bank or rich uncle, the property is bought and paid for and then deeded over to the purchaser on the promissory contingency to repay said lender. The lender has every right to claim what is rightfully his if this promise is broken. He can then proceed to resell or auction it off (again highly dependent on locale) and the new borrower would not be obliged to investigate before hand the dealings of the previous owner. This is no different than if you rent an apartment where the previous tenant was kicked out. You do not have a moral obligation to check into why the previous tenant was terminated.

 

[CCM08]

So we should assume that the 1.2 million homes that were foreclosed on last year were all just deadbeats that didn’t want to pay their bills and thus bare no guilt in creating a situation which makes foreclosure an attractive option because of ready buyers?

 

[mapleoak]

So we should assume that the 1.2 million homes that were foreclosed on last year were all just deadbeats that didn’t want to pay their bills and thus bare no guilt in creating a situation which makes foreclosure an attractive option because of ready buyers?

I think you are looking at it backwards. It may very well be the bank or rich uncle has no business borrowing money to someone who does not have the ability to repay. Lending in the first place in such a case would be an immoral act. Suppose you were the lender and purchased property for someone who promised to repay. They then proceed to not pay you back. What do you do? Do you say “all is well, you can just have the property, don’t worry about it”? Now consider that you since you don’t have your monthly payment coming in due to the default, you also cannot make payment on your own property. Do you continue to say “don’t worry” or do you collect and learn your lesson? Would you call it generous to just forgive the debt?

 

[whatevergirl]

Is it wrong to profit by purchasing and reselling foreclosed real estate? Why, or why not?

No, it’s not morally wrong. There are actually programs now, where you can help the person who is being foreclosed on, by purchasing their old loan, and then they no longer have the bad debt looming over their head. You then are the Owner of the home, and they make payments to you…as you assumed the loan. It’s lucrative, and you are also helping others. My brotherinlaw does this, and he loves it…he enjoys helping others…and to save someone from losing their home and ruining their credit is a great thing.

 

[GregoryPalamas]

No, it’s not morally wrong. There are actually programs now, where you can help the person who is being foreclosed on, by purchasing their old loan, and then they no longer have the bad debt looming over their head. You then are the Owner of the home, and they make payments to you…as you assumed the loan. It’s lucrative, and you are also helping others. My brotherinlaw does this, and he loves it…he enjoys helping others…and to save someone from losing their home and ruining their credit is a great thing.

Buying property after the foreclosure is simply good business and does not harm the former owner at all. They already gave up on their property by not paying for it.

Buying pre foreclosure is actually a gift of mercy but one should not usually buy and sell back. The original buyer was not able to pay the mortgage in the first place. Why would anyone think they could a second time around. What is moral and a ministry is to rescue the owner from have the foreclosure on their records. Declaring bankruptcy is even worse. If an investor can save the roiginal ower from either or both they have done an act of chaity.

CDL

 

[whatevergirl]

Buying property after the foreclosure is simply good business and does not harm the former owner at all. They already gave up on their property by not paying for it.

Buying pre foreclosure is actually a gift of mercy but one should not usually buy and sell back. The original buyer was not able to pay the mortgage in the first place. Why would anyone think they could a second time around. What is moral and a ministry is to rescue the owner from have the foreclosure on their records. Declaring bankruptcy is even worse. If an investor can save the roiginal ower from either or both they have done an act of chaity.

CDL

It sounds great!

 

[CCM08]

The foreclosure system in the United States works on an auction system. As such banks sell properties for significantly less than the actual market value of the property. The bank only has to credit the mortgagee with the amount of the sale. The rest of the debt, which is often very significant, remains on the mortgagee. It either must be paid, remain on the credit of the mortgagee, or be erased by bankrupcy. It’s expectionally rare that someone merely buys the mortgage from the original lender and allows the mortgagee to continue paying the debt. The real profit to be made is to purchase the property for an auction discount and then to resale it ASAP for actual market value.

If the bank had to sale the property for market value foreclosure would be a much less attractive option and it most cases the mortgagee would come out owing nothing or even receiving money from the sale to help find new housing. However, it would also make banks much more willing to work with mortgagees and use foreclosure as a last resort.

I did this with several properties and ended up feeling quite guilty about having taken part, even if only a small one, in someone losing their home.

 

[mapleoak]

The foreclosure system in the United States works on an auction system. As such banks sell properties for significantly less than the actual market value of the property. The bank only has to credit the mortgagee with the amount of the sale.

Well no, the bank only has to credit the mortgagee with the proceeds above and beyond the debt owed to the lender. True they almost always leave the original borrower in debt. The bank rarely recovers what it is owed, especially in low down payment situations where owner equity is very low.

The rest of the debt, which is often very significant, remains on the mortgagee. It either must be paid, remain on the credit of the mortgagee, or be erased by bankrupcy.

This is the heart of the issue. The debt must be repaid, but by whom? The lender has every right to what claim what is rightfully his.

It’s expectionally rare that someone merely buys the mortgage from the original lender and allows the mortgagee to continue paying the debt. The real profit to be made is to purchase the property for an auction discount and then to resale it ASAP for actual market value.

Correct, in fact it is almost impossible. A bank’s interest at this point to is recover its share while minimizing any further loss. They generally do not specialize in real estate as that is not their business. In most cases they will not loan out again and add insult to injury on a property they already have taken a loss on. On the other hand it would be foolish in most cases for a new buyer to come in and pay more for the property than what the bank is asking for. The bank will only be asking for its interest in the property. Figure also, the purchaser is going to offer less than the asking price, so on and so on. If after all the bank is willing to reloan, it most certainly will not be an assumable mortgage as these are all but obsolete. If the bank were to know of such a dealing where the purchaser is having the mortgage payments being drawn from the original owner (who is STILL the tenant), it was most likely trigger the due on sale clause of the contract. Read that as double forclosure and egg on the lender once again.
Given all this, it is certainly understandable that such properties are auctioned. The bank doesn’t have to hire a real estate agent and pay a commision and the whole rest of the barrel of apples that come with it furthering their loss. In addition, each month that the property is held by the bank, it is losing compounded interest which amounts to much, much more than the monthly interest payment it is no longer receiving.

If the bank had to sale the property for market value foreclosure would be a much less attractive option and it most cases the mortgagee would come out owing nothing or even receiving money from the sale to help find new housing. However, it would also make banks much more willing to work with mortgagees and use foreclosure as a last resort.

Forcing a market value sale is not possible. A buyer cannot be coerced to pay market value for the property. The only way to guarantee a market value sale would be for the government to take adversely. No, if it were possible it would not in fact make banks more willing to work with mortgagees, but actually encourage them to foreclose since they would always be able to recover their debt. This would obviously be much more lucrative to the bank than an auction. If it were that simple, do you think that a bank would put up with having to lose tons of money at an auction?

I did this with several properties and ended up feeling quite guilty about having taken part, even if only a small one, in someone losing their home.

Do not feel guilty as you were not responsible for someone losing their home unless you were the cause of their inability to pay for it.

 

[GregoryPalamas]

I did this with several properties and ended up feeling quite guilty about having taken part, even if only a small one, in someone losing their home.

You took no part at all in the person losing their home. They already lost it.

CDL

 

[Enoch]

Being someone who works in the sub-prime real estate business, I can tell you that the LAST thing a lender wants to do is foreclose on a home. Not only does a lender always loose thousands on each foreclosure, it’s also just bad PR. It is my company’s policy that foreclosure is an absolute last resort. In fact, we’ve even gone so far as to forgive some loans in special circumstances.

Also, people don’t realize that some foreclosures are voluntary. People will turn their houses over to the bank voluntarily when they realize that they can no longer pay for it.

There is nothing inherently evil about the foreclosure process. It is just an option that must exist in order to keep the system from breaking down.

 

[drafdog]

You have just struck an example of the root problem of the morality of capitalism as an economic system.
I can’t answer the question of the morality of capitalism any more than you can. The Church hasn’t really addressed the issue. We all know that there’s something fishy there, but we can’t quite see what it is.
According to the Torah, we are not permitted to loan at interest at all. If we followed this (and as Christians we are commanded to exceed the Torah as a measure of righteousness), the problem of foreclosures would pretty well disappear.
Leave it to the philosophers and theologians.

Matthew

 

[vern_humphrey]

The foreclosure system in the United States works on an auction system. As such banks sell properties for significantly less than the actual market value of the property.

Can you offer a cite for that?

A thing is worth what a willing buyer will offer and a willing seller will accept. An auction is a sale where willing buyers compete to see who will offer the highest (winning) price.

Auctions usually bring in more than a simple straight sale – which is why precious items like paintings and jewels are sold at auction.

 

[vern_humphrey]

You have just struck an example of the root problem of the morality of capitalism as an economic system.
I can’t answer the question of the morality of capitalism any more than you can. The Church hasn’t really addressed the issue. We all know that there’s something fishy there, but we can’t quite see what it is.
According to the Torah, we are not permitted to loan at interest at all. If we followed this (and as Christians we are commanded to exceed the Torah as a measure of righteousness), the problem of foreclosures would pretty well disappear.
Leave it to the philosophers and theologians.

Matthew

That’s an excellent forumla for shutting down the system of credit, driving small businessmen into banruptcy and ensuring that no one but the rich can own their own homes.

 

[CCM08]

Well no, the bank only has to credit the mortgagee with the proceeds above and beyond the debt owed to the lender. True they almost always leave the original borrower in debt. The bank rarely recovers what it is owed, especially in low down payment situations where owner equity is very low.

Which is more than made up for in terms of tax value on the write off to the lender.

This is the heart of the issue. The debt must be repaid, but by whom? The lender has every right to what claim what is rightfully his.

While that may be the lender usually has a role to play in the foreclosure as well. The vast majority of foreclosures are on ARM type mortgages, few fixed rate mortgages ever go into foreclosure. Of course in most cases the ARM is more profitable and lenders often attempt to sway buyers into these loans and then relax underwriting standards to qualify them for a loan that technically they don’t qualify for. TILA is fine, however, the language on mortgage applications is usually such that someone who is not qute familar with how mortgages work would not be able to fully grasp the document and yet still be in full compliance with TILA. Does interest above the prinicipal, or to say free money, ever fall into the catagory for rightful property? I tend to say no.

The bank will only be asking for its interest in the property. QUOTE]

They are, exactly because if the mortgage payments continue to be made the higher value of a tax write off is lost. They are also obsolete because it created a situation in which first time home owners could assume mortgages at prime or near prime rates when banks wanted to charge sub-prime rates and reap the profits. It also allowed individual to escape with the loss of equity, but with their credit more or less intact. As such when they recovered financially they could re-enter the mortgage market for a near prime rate, as opposed to having a foreclosure or bankruptcy on their credit and thus denying the addition profits of sub-prime lending.

it was most likely trigger the due on sale clause of the contract. Read that as double forclosure and egg on the lender once again.

And again this is an example of lenders acting to perseve more valuable tax write-offs. If that weren’t the cause clauses requiring the full mortgage upon alienation either wouldn’t exist or the bank would turn a blind eye to it. If it was really the lender’s primary interest to recover all loans in the form of a completed mortgage that would be the logical choice. Needless to say the balance sheet of a mortgage lender is more complicated than that.
It’s quite a bit like college kids and credit cards. At every university during registration every bank with a credit card to offer is going to be there taking as many applications as they can get and issuing cards on most of them. They do this fully knowing that the default rates are going to be significantly higher than in their general lending pool. Even though this is a bad risk long term it will bring the lender’s significant profits. When those defaulting students do settle into jobs and become financial stable the banks will be able to justify sub-prime and high risk lending rates. So by the time the individual student rebuild’s his or her credit the bank has made back all the money from the defaulted credit card and signficantly more profit on the sub-prime lending. Equally so when considering foreclosure lenders are taking into account the need to create this market of high profit sub-prime lending.

The bank doesn’t have to hire a real estate agent and pay a commision and the whole rest of the barrel of apples that come with it furthering their loss. QUOTE]

Again, if it were really about preventing loss than market sales would be the only option. A real estate broker’s commission on a sale is fairly small. A lender would have no problem securing discounted rates to hand foreclosure sales on the grounds of volume alone. The lender’s interest in foreclosure is simple, get rid of the property quickly, secure the tax write off, and create the sub-prime lending market.

Forcing a market value sale is not possible. A buyer cannot be coerced to pay market value for the property.

You can’t force anything. However, the fact is most lender’s will not offer loans so people can go to sheriff’s auction and purchase real property for discounted rates. The auctions appeal only to the type of investment buyer that will be interested in purchasing property well below market value. Again, it wouldn’t profit the bank more simply because they would lose the tax write off and it would adversely impact the sub-prime lending market. A paid off foreclosure is not nearly as big an impact on FICO scores as either an uncollected foreclosure or a bankruptcy.

 

[CCM08]

Can you offer a cite for that?

A thing is worth what a willing buyer will offer and a willing seller will accept. An auction is a sale where willing buyers compete to see who will offer the highest (winning) price.

Auctions usually bring in more than a simple straight sale – which is why precious items like paintings and jewels are sold at auction.

That’s because collectibles like jewels and classic cars will draw collectors to compete. This is very different than auctions that sale real property and other assets of a non-collectible nature. Research the procss of sheriff’s auctions on real estate. If banks would allow people to take loans to sheriff’s auctions it would drive up the price of foreclosures, but they won’t do that. As such the only people there are capital investors ready to pay cash for the real estate. The only interest is to acquire property below market value and then resale it on the market and turn significant profits in doing so. For example, the first property I bought in such a fashion I paid $109,000 for it and after some very minor touch up resold it for $214,000. Thus in a collector’s auction the goal to own the item up for auction for your personal pleasure and bidders will compete for that pleasure. At a sherrif’s auction the sole goal is to buy up property as cheaply as possible. As such you don’t enter into “bidding wars” with another buyer, you just pick another property.