Resuming Foreclosures: Banks Well Suited to the Task

Bank of America announced Monday that having completed due diligence the banking giant will henceforth resume evictions and foreclosures in 23 states as part of its efforts to collect mortgage debts. The end of the bank's moratorium signaled the first of the big mortgage holders (GMAC soon followed) to get back to business after recent court decisions over record-keeping shortcuts (plus state and federal attorney general sword-rattling), threatened to stall an already glacial economic recovery.

Foreclosure is the bad nightmare version of the American home ownership dream. Since there is no debtor's prison in our society, the repossession of real property, when the holder of your mortgage reclaims its collateral, is the worst punishment available for defaulting on a loan.
It used to be, if you didn't habitually pay your bills, there was no way you ever would qualify for financing to buy a home in the first place (unless you were so rich you could pay cash). Only banks, savings and loans, and credit unions were in a position to loan such large amounts to families that it would take 15 or 30 years to pay back.
Those draconian standards were done away with in the 1990s and early part of this decade, and replaced with sub-prime borrowers and inflated real estate values (fed by exotic, speculative securitization).

At the very beginning of this boom, in the late 1980s, my husband and I bought a house in foreclosure, but even though it was beautiful and in a great neighborhood, we never moved into it. The story of how we came to own a house we could not live in took years to develop and many more to recover from.

Real estate practices have changed considerably since I bought my first house in 1979 for $69,000 from a man named Wilbur. Wilbur's neighborhood, on the edge of Washington D.C.'s Rock Creek Park, had charm but the dwelling was in very poor shape. Nonetheless, I was poor and single with a 7-year-old daughter and it was what I could afford.

Wilbur's life was on a steeply downward trajectory. He only owed $17,000 on the house but he could no longer afford his payments. Fortunately for me, I was able to assume his VA balance at the low interest rate he had qualified for years earlier. Depleting my savings and requiring a co-signer friend's help on a second trust, as I signed the deed I worried I'd never be solvent again. I eventually repaired all the holes in the ceiling and craters in the bathroom floor (and turned the basement into a small rental apartment), while paying down the two notes one month at a time for the next nine years.

I'm pretty sure, if Wilbur hadn't sold to me, the servicer of his mortgage loan would have eventually taken the building and the tiny yard away from him. Based on the cast of characters who showed up to witness the closing transaction (including the former Mrs. Wilbur), I suspected my new home's most recent former occupant ended up with very little at the end of the day, either way.

Nearly a decade later, in 1988, I had married and my husband and I were expecting a baby. My daughter was by then a teenager so we were looking for a bigger place. Accustomed to the possibilities of distressed properties, I was thrilled when we found a great big fixer upper we could afford a mile or two up along the park. We made an offer, it was accepted and, heavy with child and in nesting nirvana, I arranged for the complicated process of securing financing to close the deal. Only, a funny thing happened on the way to the forum.

A few days before our transaction was scheduled, a man I had never heard of identifying himself as "a speculator" called me to say he had just bought our new house at a foreclosure auction (for about $30,000 less than we had agreed to pay the now former owner). The speculator, who regularly bought and flipped foreclosures, found out about our purchase contract when he went to inspect his win. For a moment, I thought he would honor the terms of our proposed purchase, flip the sale to us, and walk away with a five figure profit. Sadly, despite our well drawn plans (blueprints for renovation were already rendered), the sly speculator decided to "hold on to it" while his investment matured.
In my last weeks of pregnancy, I experienced several Kubler-Ross stages of grief in the devastating days that followed. Then a real tragedy occurred -- a friend died suddenly -- and I quickly regained my perspective. Our house hunt continued and I explored the options to be had at the next foreclosure auction.
In an era long before eBay was invented, I attended the bidding event at an office building with a few dozen folding chairs in the room, and a lot of men who I pictured wearing green eyeshades. The auction items were defined by lot number and map square. I was the only pregnant woman in the room. When the gentleman bidding against me deduced I was hoping to live and grow my family in the property at offer, he graciously backed out of the competition. A two-story brick residence I had never set foot inside of was ours.

Unfortunately, in my determination to replace the house that got away, I had not thought the transaction through and was soon faced with the unpleasant reality that there was a family living in the auction house that did not want to move out. Lacking the stomach to actually forcibly put three generations out of their home, we ended up renting it to them for about a year till they could get on their feet enough to buy it back from us. (In the meantime, we found a third house 22 years ago, bought it, moved in, and are still paying off the multiply refinanced mortgage).

Since then I've understood that foreclosure, even when documents are perfectly in order, is something that only hard-core players are equipped to execute. Unfortunately, the state of our economy requires such ruthless attention to profits and provides a financial sector quite willing to carry them out.