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Picking up the Foreclosure Tab

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PBNR, February 2009–Plenty of people are concerned about the cost of bailing out Main Street-the people who stand to lose their homes in the midst of the current financial crisis. Many feel that it’s not the job of the federal government to bail out homeowners who cannot afford their monthly mortgage payments. After all, those people took out risky loans. They are the ones who signed the loan documents. They are the irresponsible borrowers running this country into the ground.

For a moment, let’s ignore the question of who’s at fault. There’s plenty of blame to go around. For now, let’s consider what it costs when homeowners are allowed to lose their homes to foreclosure and who ends up with the bill.

According to a report by the Joint Economic Committee of Congress entitled “Sheltering Neighborhoods from the Subprime Foreclosure Storm,” the average foreclosure cost amounts to about $151,000, with several parties picking up the tab:

Homeowner: $7,000
Lender: $50,000
Local government: $19,000
Impact on neighboring home values: $75,000
Estimated total cost of one foreclosure: $151,000

This doesn’t even account for other potential costs, including the cost of lost productivity, a reduction in a family’s purchase power, lost federal income taxes, and the emotional and psychological costs of losing a home and losing friends and neighbors.

Although neighboring home values usually take the biggest hit as a group, the lender stands to lose the most as an individual party. The Mortgage Bankers Association (MBA) released a policy report in May, 2008 entitled “Lender’s Cost of Foreclosure,” in which it supports the fact that lenders are often the biggest losers in foreclosure: “While losses can vary widely, several independent studies find them to be generally quite significant: over $50,000 per foreclosed home or as much as 30-60% of the outstanding loan balance.”

The report cites the following sources:

• Desiree Hatcher, “Foreclosure Alternatives: A Case for Preserving Homeownership,” Profitwise News and Views (a publication of the Federal Reserve Bank of Chicago) (February 2006), p. 2 (citing a GMAC-RFC estimate).
• Karen M. Pence, “Foreclosing on Opportunity: State Laws and Mortgage Credit,” Board of Governors of the Federal Reserve System (May 13, 2003), p. 1.

Multiply these losses by the estimated 250,000 homeowners who are likely to lose their homes to foreclosure every three months, and we’re looking at over $120 billion in losses annually.

Now, bailing out Main Street doesn’t seem like such a costly proposition. In fact, not bailing out Main Street could be the most costly option of all.

Ralph R. Roberts is a consumer advocate, host of KeepMyHouse.com, and author of numerous books, including Foreclosure Self-Defense For Dummies. Ralph is based in Sterling Heights, Michigan and can be reached at RalphRoberts@RalphRoberts.com.

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