There’s a young couple, 30-ish They bought a home a few years ago while his entrepreneurial business was doing well. When there was a decline in business, he did two things: tried to keep the business functioning just enough while he went back to school to finish a degree. In the process, he got behind on house payments. The couple started working with the mortgage bankers two years ago. They were eligible for some government program to help them refinance to lower payments and keep the home. They submitted all the paperwork. The bank (or whatever the entity was) lost the paperwork and asked them to resubmit, which they did. The bank lost the paperwork—again, and asked them to resubmit, which they did. The bank lost the paperwork—again, and asked them to resubmit.
In the meantime, they had money to make regular house payments. He finished his college degree and got a job (ironically enough at a different bank). But until the paperwork was ready, there was no account to send the money to. The bank said, “Don’t worry about that; just send us the money,” and he said, “To what account? I send it the minute you tell me where to send it.”
I should mention that selling the house was always an option—except that the downturn in the economy meant that house sales plummeted, and a real estate agent overpromised and underperformed.
After nearly two years of this nonsense, they were told they were no longer eligible for the program they’d been trying to sign up for. They tried another route, a deed in lieu of mortgage or something I didn’t understand. The bank was slow in completing the paperwork (no surprise), and told them it could take up to 90 days to get it completed. Then, after just 45 days the bank sent a foreclosure notice. The couple will lose the house that they have been willing to make payments on. They will be forced to leave just before baby number three is born. They can no longer afford that part of town, where they would have liked to stay to raise their kids. But, they did just go through the last two years living in the house without making a payment, so that is some compensation.
Couple number two is a little older, in the middle of their working life. A downturn in the economy led them to know they were in trouble. They kept making payments, but it was really hard, and they went to the bank, to see if they qualified to refinance to lower payments. The bank (or whatever mortgage entity) told them they couldn’t qualify for the government program if they hadn’t missed any payments; the bank advised them to stop making payments so they would qualify. That was scary. Why would they do that? But they were feeling somewhat desperate and did what the bank told them. After two missed payments, they went back to the same bank (but for some reason it was never possible to get the same person on the phone two times in a row), and the bank told them, “Because you’ve missed payments, you don’t qualify for the program.” Hmm. So, after some unsuccessful efforts to sell, and going through a similar runaround to couple number one, the wife said, “I can’t bear to live here without paying, when things are never going to get fixed. Let’s just give the bank the house.”
Another acquaintance is a couple within a decade of retirement. He works in the medical field; she is a teacher. When business was going great, they bought a nice home in a favored part of town. Then, a downturn happened—I don’t know all the details, but it was enough that staying in the nice house wasn’t going to work out. They worked with the bank, and tried to sell. Higher end homes were particularly hard hit by the drop in real estate sales. They would probably only have missed a few payments. They were at a place in life where they had proof of the kind of steady customer they would have been, if the bank had been willing to work with them. A lot of confusion ensued (which is beginning to look like standard operating procedure). They got a foreclosure notice, which, at their point in life, was especially painful. They left their dream home and started over, hoping to make enough headway before retirement that they wouldn’t become a burden on their children.
A banking executive I know explains that some of the difficulty is in the way banks are set up. Banks are not in the business of real estate; they don’t want to acquire homes, along with the burden of maintaining until the property can be sold. So they have always been willing to work with mortgage holders that are likely to make good on their loans. Those who aren’t going to make good ought to be foreclosed on quickly, for everyone’s sake, and the homes auctioned off quickly. But normal practices haven’t been allowed for a while.
One problem, at least in this executive's bank (one that wouldn't have taken money from government bailouts without being forced) is that the foreclosure department is totally separate from the refinance department. In the bank’s mind, those two departments handle completely separate functions. But the government, in its “well intentioned” meddling, forced these programs on banks, to help out people with failing mortgages. Banks weren’t set up to handle these programs, nor did they really want to implement them, including hiring and training people for the sole temporary purpose of doing the government's bidding. So they didn’t automatically restructure their whole industry.
So the refinance department had all the information about the people involved in these refinance programs. And from their point of view, as long as they were actively working with someone, all was well; those people were a good risk and didn’t have to worry about foreclosure. But they didn’t share this information with the foreclosure department. So, no matter how actively the mortgage holder was working with the bank’s refinance department, the foreclosure department was completely unaware that the mortgage holder had done anything but fail to pay. Bureaucracies are like that (and government and large banks are both bureaucracies).
On the macro scale, if government had refrained from meddling in housing, from the 1980s on, banks would have been free to do what they have traditionally done well: judge whether a person is a good lending risk, which minimizes defaults; and handle necessary defaults quickly and efficiently. There would not have been a housing bubble followed by an inevitable popped housing bubble. And people like all three of the couples above, even had they come on hard times, would very likely have solved their problems either by working with the banks or by successfully selling their homes. Banks would have gotten full payback for the mortgage, mortgage holders would have gotten at least part of their equity, and new buyers would have gotten a good deal.
Anecdotal evidence doesn’t prove a rule, but it can clue us in to a rule that maybe we can prove with actual research. So what I see from these stories today is the rule of unintended consequences: government interference will generally cause damage to the very constituencies it intends to help.