Homeowners Free-Riding on the Bank's Dime

Free housing, anyone? According to a recent Treasury report covering 34 million mortgages nationwide, an average of 840,000 homes were in the foreclosure process over a 15-month period ended Sept. 2009. But during that same period, an average of just 108,000 homes actually completed the foreclosure process.

That leaves a small army of homeowners who have been "foreclosed" on and who stopped making monthly payments, but still live in their old homes while the foreclosure process drags on.

Free housing, baby!
Some of the more extreme examples of this are utterly comical. Consider a story the popular Irvine Housing Blog posted yesterday [emphasis mine]:

The owner of today's featured property paid $465,000 on 10/23/2003. She used a $372,000 first mortgage, a $93,000 second mortgage, and a $0 down payment. On 12/30/2004 she refinanced into an Option ARM for $486,500. Two months later on 2/3/2005 she opened a HELOC for $67,000. Total property debt is $553,500 plus 3 years of missed payments, negative amortization, and fees. Total mortgage equity withdrawal is $88,500.

Read that again: Three years of missed payments after extracting over $88,000 in home equity loans. The blog continues:

The owner of this property stopped making payments sometime in late 2006. It has been over ... [three years] since this owner stopped paying, and she is still listed as the property owner, so one can assume she still occupies the property.

Not a bad deal -- for her.

Of course, free riding for three years is hardly typical. The Treasury report notes that foreclosures "can take more than 15 months to complete." Even that seems extreme.

However long it takes, the backlog of pending foreclosures is massive almost everywhere you look. A recent report by Barclay's Capital shows how deep the problem is in major cities:

City

Percentage of Loans Already Liquidated Through Foreclosure*

Percentage of Loans Seriously Delinquent Waiting to Go Through Foreclosure

Boston

3%

8%

Chicago

3%

12%

Denver

7%

8%

Las Vegas

15%

23%

Los Angeles

5%

11%

Miami

3%

15%

New York

6%

21%

San Diego

6%

10%

San Francisco

5%

8%

Washington

4%

9%

Sources: Barclays Capital, WSJ.*Since Jan. 2008.

That's a lot of people living for free, waiting for the bank to kick 'em out.

Some of this monster backlog has to do with laws that slow foreclosure process -- New York is a good example. Most of it, though, is simply that banks can't keep up with an onslaught of delinquent loans (not that you should feel bad for them). Fannie Mae (NYSE: FNM  ) and Freddie Mac's (NYSE: FRE  ) 2009 foreclosure moratoria didn't help, either.

When a bank comes across a seriously delinquent mortgage, it usually has two options: Renegotiate with the homeowner and modify the loan, or foreclose. Even with the horrendously long backlog process, the choice is usually foreclosure.

One way to track banks' unwillingness to modify is to look at participants of the government's HAMP mortgage modification program. The most recent report shows that Citigroup (NYSE: C  ) has only 50% of eligible borrowers in some stage of a mortgage modification; JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) have just under 40%; US Bancorp (NYSE: USB  ) 27%, and Bank of America (NYSE: BAC  ) just 22%.

Why so low? One explanation is that the redefault rate on mortgage modifications is huge. Knowing homeowners will default even with a modified loan, and not wanting to go through the hassle and cost of the modification process, banks are inclined to foreclose, even if it means months -- maybe years -- before they'll actually take control of the property.

Money sloshing around, looking for a home
The most interesting observation on this topic comes from Motley Fool blogger dwot, who inquisitively wrote that with so many homeowners living free while waiting for banks to do something, "a heck of a lot of money [is] not going into housing and probably going into other areas of the economy. That seems like a heck of a lot of money other areas of the economy will lose when these people eventually start paying for housing again."

As far as total economic activity is concerned, that shouldn't matter. As long as money is moving around, we'll all be good. But this crisis started with crazy imbalances that directed too much money into housing. Have the tides turned? Is an equally ridiculous amount of money now being diverted from housing? Perhaps. But it's too early to tell what effect it's had on areas like consumer spending.

Just another example of how strange this recovery has become.

What do you think about staying in a home without making payments? Fire away in the comments box below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (13)

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  • Report this Comment On March 19, 2010, at 10:43 AM, questioner5000 wrote:

    How DARE you publish an article like this.

    Everyone knows, (because our leaders and the media have told us so), that people being foreclosed upon are all minority, single parents, with 10 sickly, starving children, who are losing their share of the American Dream, after decades of hard work, and are now being thrown out into the snow, (even in Las Vegas), by ruthless bankers, (who all look like "Snidely Whiplash"). These bastards forced people into buying more house than they could afford, overspending on multiple credit cards, and taking out HELOCs for all of the "paper equity gains" the market told them existed, in order to buy a couple of SUVs and that Hawaiian vacation that they had to take, (in order not to lose face in the neighborhood).

    How DARE you contradict that image!

  • Report this Comment On March 19, 2010, at 12:00 PM, Borbality wrote:

    Makes me wonder if I should just stop paying for a while and save up some cash. I don't need any credit so that's not a problem.

    My neighbors made the painful decision to walk away from their home after one of the couple lost a high-paying job. Now they've been waiting for the foreclosure process for months. They had no idea they'd be living payment-free for close to a year now, with no apparent sign of anything happening.

  • Report this Comment On March 19, 2010, at 2:33 PM, ByrneShill wrote:

    @Borbality: If you're underwater on your mortgage and you forecast money problems, then yeah, now would be the best time to stop paying. Keep all the cash you'd be sending your bank for the mortgage to make sure you don't need credit, and voilà!.

  • Report this Comment On March 19, 2010, at 4:51 PM, Borbality wrote:

    Nah my situation is different. I believe we're overpaying a little (Bought in May 2008 as first time homeowners and newlyweds) but we're both employed and able to pay our bills and save a little.

    Just annoying to see nicer houses going for what we paid. But my problems are pretty small compared to many others.

  • Report this Comment On March 19, 2010, at 5:35 PM, kedo76 wrote:

    I loved living in my house for 11 months for free. I asked Wells Fargo to refinance me when my house dropped 175k in equity but was merely toying with the idea at that point. Then when the banks got their bailout I turned suddenly very serious. Living for free for 11 months got us every dime we put into the house back, and now 6 months later my credit is already recovering and I just bought a car and only had to tell them what happened and they couldn't have cared less and financed me just fine.

    This whole thing is a joke. I could afford my payments, but why would I if I am not going to see a profit on my investment? Easy answer if you ask me, and I don't care who you ask, we ALL expect a return on investment when we buy a house, even those meek morons who "buy a house just to have a house." BS.

  • Report this Comment On March 19, 2010, at 6:01 PM, gskinner75006 wrote:

    We lost our way when the house stopped being a home and became an ATM machine and the family was just "people" that happened to live there with you. Your children, their children, etc... will live in a third world country compared to what we had in the past. Very sad. I wonder what musical group though will do the first "feed America" concert. A band from the new world leader, China most likely. Man, their language will not be easy to learn!

  • Report this Comment On March 19, 2010, at 6:59 PM, alexxlea wrote:

    We need to go about this the smart way.

    1. Everyone walks out on their properties. Everyone. Just camp out and starve the beasts.

    2. They aren't going to throw everyone out. They can't. They'd have gotten the point by then.

    3. Live in your properties.

    4. Make things and buy food and be productive to society, unlike leeches that make you think that capital is supposed to work the way they shoehorn it.

    5. Live within your community, with your community. Families help families, and get to know each other. Everyone stops feeding off of everyone's corpses.

    Shoot, I think I just described what's going to happen after the inevitable reset. Everyone's fine and gets along fine, everyone that loved money and had a lot of it gets shafted. Their expansive networks of property and other junk doesn't matter because they only own it on paper, and is claimed by other people or the land.

  • Report this Comment On March 19, 2010, at 7:00 PM, alexxlea wrote:

    We need to go about this the smart way.

    1. Everyone walks out on their properties. Everyone. Just camp out and starve the beasts.

    2. They aren't going to throw everyone out. They can't. They'd have gotten the point by then.

    3. Live in your properties.

    4. Make things and buy food and be productive to society, unlike leeches that make you think that capital is supposed to work the way they shoehorn it.

    5. Live within your community, with your community. Families help families, and get to know each other. Everyone stops feeding off of everyone's corpses.

    Shoot, I think I just described what's going to happen after the inevitable reset. Everyone's fine and gets along fine, everyone that loved money and had a lot of it gets shafted. Their expansive networks of property and other junk doesn't matter because they only own it on paper, and is claimed by other people or the land.

  • Report this Comment On March 20, 2010, at 12:54 AM, dinobaba wrote:

    Hey, if you believe in the free market, like I do, then the dipsticks that made all these loans, in the legal and economic context that they did, can't bitch when the chickens come home to roost. I say milk it for all you can (legally and economically, that is). Only problem is that us taxpayers are ending up footing the bill, that's the part that sucks.

  • Report this Comment On March 20, 2010, at 12:58 AM, dinobaba wrote:

    alexxlea, ironic thing is people are going to call you a commie, I think you are the real free marketer.

  • Report this Comment On March 30, 2010, at 1:36 PM, rizzo101 wrote:

    This article is of course sarcastic, but it is also a little short on the full picture.

    Yes, there are people gaming the system and strategically defaulting, but did the author only assume that the owner is still living there because it was listed in that person's name?

    Maybe she left in 2006, or 2007?? If you don't have all the facts, then ASSuming isn't helping your journalistic integrity.

    I'm in Florida, so I know about real estate problems. I know of more than 4 dozen midlevel to high end homes that have been vacant for 2 years or more, but the banks won't foreclose. This is in my immediate area of Tampa Bay and my own neighborhood. All the property is still listed in records with the last buyer, but they have mailed in the keys long ago.

    The banks are desperately hoping things will turn around and recapitalizing for even sharper losses, but they don't want to pay property taxes or association fees, so these places sit, well past even a lengthy foreclosure proceeding.

    I also know that there are squatters around as well. It will be interesting to see how many upscale neighborhoods have more strategiac (sp?) defaults in the coming year, and elect to stay, when the thought never crossed their mind before. In my experience, the people that have more to lose, are less likely to be trusted than the average blue collar folks that have been hit hard as well. I know some people have only looked at homes as "investment". They usually walk when the grass is greener. People that bought "homes" are devastated and are losing everything trying to turn around their situation and get current on payments.

    I also have friends in CA that are foreclosing due to job loss, but are not staying "rent free" even though the bank won't toss them out for at least another year. Not everyone is as cynical as the author tries to make out. But that doesn't grab as many readers.

  • Report this Comment On March 30, 2010, at 6:44 PM, smokyfied wrote:

    There are plenty of targets for the anger and frustration felt by the regular folks (I include myself in this group!) who are paying the cost of this crisis in many ways. The bubble inflated my property taxes and left my nice older neighborhood scarred by tasteless, empty McMansions which speculators built in place of smaller, classic bungalows and craftsman style homes. Topping my list of targets for my anger are pompous, "smartest guy in the room" Wall Street types, followed by Fox News inspired bigots (Watch out fat white guys! Overly fertile minority women, backed by Nazi socialist Muslim black dudes are out to get you!), who are then followed by kedo76. Your pose as a shrewd businessman is pretty hard to take. You made a bad investment, went bankrupt, got kicked out of your home ("investment property") and then managed to survive your mistakes by being one of the last lemmings to march off of the cliff. You were saved by being slow to show up at the wheeler dealer wanna-be party. It's called dumb luck, not shrewdness. I guess I am one of the meek morons that bought a home and invested elsewhere. My home is paid off.

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