Jan222018

Delinquent borrowers who lost their homes in foreclosure moved in next door

Rather than exacerbating a problem with homelessness or creating a mass migration, most people who lost homes in foreclosure stayed in their neighborhoods.

Repost from OC Housing News 2011-2016

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What happened to people who lost their house in foreclosure? Did they end up homeless and destitute? Did they resort to a life of crime or prostitution? Was foreclosure the end of modern civilization as we know it?

People who tried to prevent foreclosures proffered all of these fallacious reasons why we needed to stop foreclosures and give delinquent borrowers principal reductions or free houses. The reality is, most people who lost their homes in foreclosure moved into a nearby rental — and many were financially better off with a lower cost of housing in something they could afford.Las_Vegas_foreclosure

One of the houses my fund bought at auction in Las Vegas is still occupied by the former owners. Before they quit making payments, their obligation was for $2,200 per month, and it was due to increase. I bought their house, fixed up the problems from deferred maintenance while they were squatting, and I signed a lease with them for $1,050 per month. That was early 2011, and the former owners are still there. They didn’t have to move, and their cost of housing was cut in half. If they hadn’t defaulted, they would still be paying $2,200 per month in an underwater house, unless they obtained temporary relief from a “permanent” loan modification. I think they are better off as renters.

Most people who lost their homes in foreclosure weren’t fortunate enough to stay in the property, but most moved to a comparable rental nearby. For most it was a practical decision; their children had friends in the neighborhood or school, and most delinquent borrowers still had jobs — contrary to the popular spin, most foreclosures were not caused by job loss but by toxic mortgages. People with jobs stay in the area to keep it; plus, with few jobs created elsewhere, most people had nowhere else to go. As a result, there were no mass migrations associated with the Great Recession.

I lost my home and moved across town

During the Great Recession, some 10 million Americans, a whopping three percent of the population, were foreclosed, evicted or otherwise booted from their homes. It’s been one of the quickest and most vicious displacements in American history. And where did everyone go?

Most likely, across town.

Sometimes not even that far. Many people didn’t want to leave their school districts or even the neighborhoods they used to live in because they didn’t want to disrupt the lives of their children, and since so many rentals were available because the neighbors experienced the same fate, many rented next door.miss_HELOC_money

… in the Great Recession, there has been no exodus. No masses have streamed across state borders. At the height of the recession, from 2009 to 2010, only about 10.5 million people moved outside their counties, according to the Census Bureau — the lowest proportion since the bureau started tracking the number in 1947.

Instead, the displaced likely moved within their towns and cities. In 2010, the number of local moves increased sharply, to 24.2 million, the highest level in a decade, according to a study by Michael Stoll, professor of public policy at UCLA. Nearly a quarter of them moved for cheaper housing.

I think that’s a poor estimate. Employed renters probably moved for a variety of economic reasons, but those who moved due to foreclosure were all moving for cheaper housing. If they could have afforded their old house, they would have stayed there.

Another reason people stayed close to home is that the recession was so broad. Most regions were hit, and from a job searcher’s perspective, there were few green pastures to be found. During previous downturns, some states, including Florida and Texas, received a huge influx of migrants. Not this time: “There was no good place to move to, and some reason to stay,” Stoll says.

People who were forced to move due to economic hardship often had family, friends, or other support people to assist them where they live; if they moved away from their roots, they’d have no support at all.

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Still, people were forced to move. Residents of some cities appeared to be playing a game of musical chairs. In Las Vegas, for instance, one in five residents moved somewhere else in town between 2008 and 2010, says Stoll. And local moves spiked highest in metropolitan areas like Vegas, where unemployment surged and the housing bubble burst. …

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“There is little data on what happens to foreclosure migrants. A 2011 study by the Federal Reserve argues, surprisingly, that while foreclosure raises the chances of moving, most postforeclosure migrants don’t end up in “substantially less desirable neighborhoods or more crowded living conditions.”

So much for the sleeping in the street meme.

But the study neglects to take into account other costs. Being foreclosed during a housing crisis means not only losing the equity in your house, but also often entering the rental market right when competition is fierce and prices are skyrocketing. “So at a time when you want to downsize, you end up paying a lot more for rent,” says Gottesdiener. …

That is largely untrue. Most properties purchased at auction were converted to rentals, so as each foreclosure created a new renter, it also matched it with a new rental unit. There was some lag, which explains the rapid rent increases at the onset of the recession, but the vast majority of new renters paid substantially less to rent than they did to own.

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People who lost houses in foreclosure paid a terrible emotional price, and most were wiped out financially as well. And while we may feel sad for what they went through, most emerged in the same neighborhood with far less debt and a cost of housing they could sustain — something we should celebrate.