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Foreclose or not to foreclose: That is the question

Published October 16. 2010 09:00AM

This week, the buzz on the business news stations is about foreclosures. Yes, there has been abuse by the banks that submitted incomplete or incorrect legal documents to the court as part of the foreclosure process. But the fact remains that people who have not paid their mortgages and have not worked out new terms with the banks or their mortgage holders are in default. I do feel sorry for people who are about to lose their homes. Some may have bought homes that were too expensive. Others may have had difficulty refinancing when the housing bust deflated the value of their home. Still others may have lost their jobs. Our hearts go out to all of these people but it is still their responsibility to pay their debts or face the consequences.

My grandfather told me that I should always pay myself first. What he meant by that was that I should save 5 percent of every paycheck for a rainy day. By paying myself first I was able to accumulate a cushion for use during periods of economic distress. I followed his advice and it has truly helped me to navigate dry spells. When I listen to Dave Ramsey on TV or read Money magazine, they mention that every family should have at least six months cash put aside in a savings account. This is very good advice indeed. If one falls upon hard times, having a cash reserve can ensure that you pay your living expenses and avoid foreclosure.

People who follow this approach live within their means. That means they do not go out to dinner unless it is a special occasion. They buy a new car in good times and keep it for 10 or 15 years rather than leasing or buying a new vehicle every two or three years. They shop at VF outlets or discount stores, not Saks Fifth Avenue. Most do not take expensive vacations. They simply pay their bills by working at whatever job they have to support their families.

Now there are many people who lived the high life when times were good. They bought the nicest clothes and cars, often on credit. They paid the minimum on their credit cards and loans and continued to spend more than they earned. When the recession hit and they lost their jobs they could not pay their bills or their mortgage. Our government recognized that these poor souls who spent instead of saved needed help. There are government programs to assist them in renegotiating their mortgages, and provide them with unemployment insurance. Food stamps and welfare payments are available for those in the most desperate straits. Meanwhile, those who were frugal used their savings to stay afloat, pay their bills and support their family. Tell me, which person is smarter?

If a person can't pay their mortgage they need to work out a deal or they can expect to be evicted. A bank moratorium on foreclosure will only forestall the inevitable. Foreclosure is not the ideal solution but it enables the bank to recover some or all of the funds they advanced for the mortgage. This money can be put to work for the bank as they issue new loans and mortgages. A foreclosure moratorium prevents the banks from recovering their cash and will restrict their ability to lend. Small businesses need loans now so they can expand their businesses, hire more staff and produce more goods for their customers. If cash gets any tighter, small business will not be able to take the lead in the economic recovery. If the moratorium is sustained more than one or two months the banks could become victims and may end up in dire straits themselves.

In the next six months we may have another round of bank failures despite the new financial legislation. Is Bank of America too big to fail? Will the government bail it out as it did with banks in the last round of insolvencies? Or will banks be permitted to go bankrupt. Will the government permit Wells Fargo, Bank of America and Citibank to liquidate? Will they break them up and give the parts to other banks? Or will they sacrifice the bondholders and stockholders and give the banks to the unions as they did with General Motors?

These questions must be answered and they must be answered now. We cannot wait for the moratoriums to destroy the banks and the mortgage business. Last year I was on vacation in Jamaica. In this country, the banks stopped providing mortgages to all but the wealthy. As we drive along some of the roads we saw many houses that are in various stages of completion. Most are just bare cement walls, many without roofs, sitting on a little piece of land. When I asked about this I found out that the inability to get a mortgage forced the average person to pay cash for their homes. This is almost impossible to do in Jamaica and even in the United States. The Jamaican solution was to build their properties in pieces. First they would buy the land. When they have enough money they build of a few walls. A year or two might pass and they would put a roof on the structure. This might be a kitchen or living room. Over a decade or so they would complete their house as they convert it from a shack into a home.

If a bank cannot foreclose on homeowners who do not make payments, then they can't continue to issue new mortgages. In the mid-to long-term the banks will stop lending for mortgages and seek other uses for their capital that provides a profitable return. Many in our society chastise the banks for their "outrageous" profits and practices. Without our banks we could not finance our homes, use a credit or debit card at our stores, save for retirement or for our children's education or even write checks to pay our bills. It is time to stop bashing the banks and start enforcing the terms and conditions of loans and mortgages. There is no free ride for people in America. In my opinion, everyone must pay his or her way. For those who are in financial distress, there are some programs to help them. More importantly, many of them have family who are willing to help them out.

If a son or daughter loses their house, then they may be able to move back in with their parents. While not the ideal solution, it is happening more and more in these difficult times. I have several friends who have welcomed their children back into their homes. If and when the recovery comes the children will be able to get jobs again and rent an apartment or buy a small home. Families should support each other rather than forcing banks to permit those who default to stay in houses they cannot afford without paying their debt.

For a recovery to take hold, the banks must clean up their balance sheets. We must write off loans and we must foreclose if necessary. We need to stop whining, pull up our socks and get back to the work of rebuilding our economy and our nation. As November 2 approaches listen to those politicians who are talking about the real issues facing our nation. This election is not about abortion or gay-rights issues. It is about the economy, jobs and restoring prosperity. Those who we elect will need to encourage businesses large and small to hire again. We must provide jobs for the unemployed. But most of all, everyone needs to pay their way. We cannot support those who do not attempt to support themselves.

© 2010 Gordon Smith All Rights Reserved

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