Commentary
It increasingly appears that the only answer that the banks and our elected officials can come up with in the face of the foreclosure crisis is FREE RENT.
At the moment we likely have more than 400,000 households in California that are making no house payment. There are 280,000 in some stage of foreclosure, and 120,000 or more that are not making payments but are not yet in foreclosure. The time the homeowner stops making payments until they are forced to leave can easily be a full year. If you take the original loan amounts at a reasonable 6% interest and the fact these owners have likely stopped paying property taxes as well, we are talking a cool $1B/mo in free rent statewide (which is likely artificially propping up the state economy now that they can spend it on other things).
Banks were among the first to jump on this bandwagon extending the time before they file foreclosure. Wells Fargo for example changed the timeline for charging off home equity lines from 120 days to 180 days. Nationally 120-day rates are at a much higher percentage than foreclosures, confirming this delay tactic.
CA recently passed Senate Bill 1137, which extends the notice period for a renter in a recently foreclosed home from 30 to 60 days, never mind the fact that a Notice of Default warning them of the need to move was posted on their door an average of 5 months before the foreclosure took place or the fact that banks commonly offer renters $2-4k to move and leave the house clean. Now we have the US Senate Banking Committee asking Freddie and Fannie to delay foreclosures for 90 days.
Seems the nearly year of free rent and the $2-4k in cash-for-keys, now ultimately at taxpayer expense, isn't enough. There is no doubt that this crisis is awful for homeowners in foreclosure, but delaying the inevitable, and handing out additional free rent is not the answer. If anything it incentivizes others to default as well. With the failures of Indymac, Freddie, Fannie, and the impending failures of Lehman, WaMu, and others government intervention may be necessary. But free rent will do little more than drag this out, encourage additional defaults, and make it more painful for all down the road.
