Warren Buffett’s annual Berkshire Hathaway shareholder letter is out. As I peruse the letter, his comments on the real estate housing bubble stand out (Page 15):
"As is well-known, the U.S. went off the rails in its home-ownership and mortgage-lending policies, and for these mistakes our economy is now paying a huge price. All of us participated in the destructive behavior – government, lenders, borrowers, the media, rating agencies, you name it. At the core of the folly was the almost universal belief that the value of houses was certain to increase over time and that any dips would be inconsequential. The acceptance of this premise justified almost any price and practice in housing transactions.
Homeowners everywhere felt richer and rushed to “monetize” the increased value of their homes by refinancings. These massive cash infusions fueled a consumption binge throughout our economy. It all seemed great fun while it lasted.
(A largely unnoted fact: Large numbers of people who have “lost” their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.)”
I will not pretend to add anything much to Buffett’s shareholder letter, except to say that there are other situations where the homeowner was the winner and the bank the victim. Consider the homeowners who stopped paying their mortgage, but continued residing in the house, whether or not they had used the home as a financial “cookie jar”.
I have personal knowledge of two local citizens each of whom lived for more than 2 years in a house that was scheduled to be sold through foreclosure. One lived in Venice and one in Englewood. During this time they paid electric and taxes, but not the mortgages. I submit the lender was the victim in both cases. But the homeowners were partially innocent too in that the lenders would not negotiate the loans UNLESS the borrower missed at least three monthly payments. Once you miss three, why start up again?
And further, I know a fellow in Sarasota who lost his house to a foreclosure auction after he had not paid the mortgage for over a year. At the foreclosure auction he approached the buyer (of his house who was an investor) and asked if he could rent the property—since he was still living there. A deal was struck, and he didn’t have to move. He happily rented the home for about a year.
I understand that he has since bought the house back from the landlord, for a premium over what the fellow paid at auction, but now his mortgage is $100,000 lower than it was before the foreclosure. The lucky homeowner withstood some sleepless nights, but won big, while the lender sucked up the loss.
Of course these lucky homeowners now are saddled with spotty credit and will have some explaining to do when they try to finance a home; these kinds of credit blots will stay on their credit for some time. In reality, most average borrowers of the 2013’s and beyond will bring these credit blots to the table and lenders looking to make loans will probably have to overlook them, simply as a “sign of earlier times”.
Dane Hahn is a real estate professional practicing in the Englewood, Florida area. He can be reached at 941-681-0312 or at dane.hahn@gmail.com. See him on the net at http://www.danesellsflorida.com/