Banks And Housing Woes: Houses are Perishable- They Need to Move.

Posted on August 13, 2012

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As if it weren’t bad enough that poor lending practices drove a disastrous housing “bubble” that predictably popped, precipitating a credit crisis and doing a lot to tank our economy – the banks are still at it.

In Fredericksburg, Virginia, there is a beautiful historic district downtown.  You would think that a foreclosed home in this district – one with river views, one which last sold for over a million dollars, one that has buyers lined up wanting to rescue it – would be snapped up in no time.  Not so.  The “Pink Lady,” as this Victorian home is locally known, is literally rotting to pieces in front of the neighbors’ eyes, and buyers can’t even so much as make an offer.  It is simply “unavailable.”  So this historic property on prime real estate sits vacant, and continues to rot.

The Pink Lady is caught up in the same kind of idiotic red tape that so many other foreclosed homes are, as well.  Bill Freehling details the particulars of this case at Fredericksburg.com.  The biggest problem is that the mortgage, like so many others, was “bundled” and sold to a mortgage-backed security… one that has many investors.  And that supposedly means there is no individual, or even a particular bank, that owns the mortgage on the Pink Lady.  You know what they say – no ownership, no responsibility.  So the grass does not get cut.  Repairs are not made.  The property is not listed for sale.  It is just a meaningless artifact, the detritus of a loan gone bad, an anonymous bit of data in an enormous “mortgage-backed security.”

But wait, I’m not understanding this.  Suppose that the home was not foreclosed, and the last owner still lived there.  I’m no financial guru, but even if the mortgage was bundled by the lender, the owner would still be able to sell the home or refinance his mortgage, right?  So… why the sudden difficulty in maintaining and selling the home?  If the bundling of debt is irrelevant to sales of homes with valid, current mortgages, and banks are capable of repossessing and selling foreclosed properties then why is a bundled, foreclosed property really any different?

Granted, financial institutions seem to make everything a whole lot harder than it needs to be, and reading about the basics of mortgage-backed securities is giving me a headache.  And the Pink Lady has some other entanglements that never should have come to pass.  But I’m not cutting the banks any slack on this, for some very common-sense business reasons.

First, whether a property is foreclosed or not is irrelevant.  If it’s part of the collateral on a mortgage-backed security, then it’s in the interests of the mortgage lender/security issuer and the investors to keep those properties viable and salable.  We all know that the longer a home sits vacant, the more damage accumulates, the less attractive it becomes, and the less it will eventually sell for, and that in turn depreciates the real value of the mortgage-backed security.  On paper, as an anonymous data point, I’m sure the Pink Lady looks great.  A million-dollar property.  In reality, it’s rotting, overgrown, dropping in real value by the day.  It still – for the moment – has altruistic buyers interested in it, but I highly doubt anyone in their right mind will pay a million dollars, and then another couple of hundred thousand for restoration.  And it’s only going to get worse as the days roll on.  Houses are not made of gold.  They are perishable, so they need to move.  And that’s my complaint here:  holding on to rotting properties out of some sense that disposing of them is “too complicated” is flat-out irresponsible, and will hurt investors in the long run.

The Pink Lady, and countless other rotting foreclosed homes nationwide, are symptomatic of that old Wall Street trick:  in the quest for liquid cash, they have continued to create hollow investments in the form of bundled mortgage-backed securities.  Not a bubble, exactly.  More a termite-eaten structure about to collapse.

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