The Coase theorem states that if there are no transaction costs, bargaining will lead to the same outcome regardless of the allocation of property rights. This highly counterintuitive result has a very profound implication, such as that the law should focus more on predictability than justice, because if one suffices with a reasonably just law that is highly predictable, one should expect the same net effect in terms of people and businesses doing what they would have done to maximize their welfare if the law were perfectly just. Predictability is a practical supreme objective for any justice system.
The many steps a bank must take in a foreclosure, and various rights of homeowners to supersede a foreclosure sale, basically make the abandoned property the concern of no one for a long time (avg time of delinquency: 631 days!), and these laws are counterproductive responses. For example, during the crisis a new law allows mortgage holders to reclaim the house within a 6 month 'redemption period', which is designed for the possible but improbable case where someone falls behind on a mortgage but has positive equity in their home. In practice just means the property lies fallow for 6 more months than necessary.
Short sales have become more popular because they can shorten the time a house is not being used. In a short sale, the mortgage holder sells the home for less than their mortgage outstanding (banks lose), but the property is then owned by someone who actually will pay taxes and mortgage payments and take care of the property. The benefit to the borrower is that this is not as harmful as a bankruptcy or foreclosure on their credit history; the benefit to the bank is the property avoids wasted time with no upkeep, and the house can actually start generating cash-flow again.
It's a second best solution forced on us via naive regulations, but anything that shortens the time properties remain unkempt, unpaid, the better.
The many steps a bank must take in a foreclosure, and various rights of homeowners to supersede a foreclosure sale, basically make the abandoned property the concern of no one for a long time (avg time of delinquency: 631 days!), and these laws are counterproductive responses. For example, during the crisis a new law allows mortgage holders to reclaim the house within a 6 month 'redemption period', which is designed for the possible but improbable case where someone falls behind on a mortgage but has positive equity in their home. In practice just means the property lies fallow for 6 more months than necessary.
Short sales have become more popular because they can shorten the time a house is not being used. In a short sale, the mortgage holder sells the home for less than their mortgage outstanding (banks lose), but the property is then owned by someone who actually will pay taxes and mortgage payments and take care of the property. The benefit to the borrower is that this is not as harmful as a bankruptcy or foreclosure on their credit history; the benefit to the bank is the property avoids wasted time with no upkeep, and the house can actually start generating cash-flow again.
It's a second best solution forced on us via naive regulations, but anything that shortens the time properties remain unkempt, unpaid, the better.
3 comments:
At least one of the problems here is that in many cases there is not a clear delineation of property rights, specifically, and thanks to the “robo-signing” scandal, it may not be clear that the bank/party attempting to foreclose on a delinquent homeowner is actually the legitimate owner of the mortgage title.
The larger problem is that the government has done everything it possibly can to prevent the post-2008 residential real estate market from clearing properly so good luck selling them on the Coasian Solution.
That there is even a special term for selling a residential property for less than the purchase price (“short sale”) is a bit absurd; as if it is somehow against the laws of the universe that you should actually realize a loss on a real estate transaction. There isn’t a special term for buying high and selling low in the stock market. And thanks to ZIRP not being able to preserve wealth (much less realize a positive return on it) is rapidly becoming synonymous with the term “reality”.
There's a special term because ordinarily, you can't sell what you don't own, and a mortgage-owner with zero equity shouldn't be able to sell the property, the bank should. That is in the original understanding, and is true for other cases where you post collateral for a loan (eg, you can't sell collateral after falling behind on a loan in general).
Robo-signing is pure pretext. Many studies have found only trace cases where this had any implications for whether the borrower actually was delinquent.
I see, well thanks for the education there. I would have thought that the lender would have to seize the collateral first (and have the deed etc. adjusted) before getting the exclusive right to sell it. It still seems like the best mechanism for turning over property with a delinquent mortgage should be the foreclosure process – although perhaps with reforms to prevent indefinite delays and changes as to how consumer credit scores are calculated so that bad market timing isn’t punished as severely as more blatant financial irresponsibility.
I agree that in most cases it is irrelevant whether a delinquent borrower has failed in his obligation to Bank A or Bank B but if the law says that mortgage title purchase&sales (or whatever) are only legit if they are properly transacted then that’s that. Maybe the laws are antiquated and should be changed but the banks should have lobbied for just that instead of cutting corners as they did. It’s technically wrong, I believe they’re losing cases over it and it has helped further screw up an already screwed up market.
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