Tuesday, May 20, 2008

Trash outs and cash for keys

(Calculated Risk - Tanta) Here's a wee bit of cognitive dissonance with your coffee, courtesy of TheStreet.com:

Neighborhoods across the U.S. are being ransacked.

In fact, about 50% of homes have substantial damage following foreclosure, according to a survey of 1,500 real estate agents by Campbell Communications in Washington, D.C. (This is not just due to homeowners looting their foreclosing properties; some do not have the financial capabilities for the home's upkeep, and other times vandals are responsible.)

To keep real estate agents from being left to sell homes with floor and carpet damages, holes in the wall, and removed appliances, a preventive measure is being offered to homeowners facing foreclosure known as "cash for keys."
I have been wanting some real numbers--not just a few splashy anecdotes--about the "trash out" thing. This is because it's exactly the sort of car-crash story the press loves, so it's the sort of thing always in danger of getting overstated (like the "burn outs").

The thing is, "trash outs" have as far as I know existed ever since the invention of foreclosure; they were simply rather rare. Not that most foreclosed homes were ever in pristine condition. But that's the thing: for most of my experience in this business the vast majority of REO damage was in fact due to the mortgagor's inability to afford repairs (indeed, the exploding water heater that damaged several hundred square feet of carpet might well have been the financial catastrophe that sent a struggling household into foreclosure in the first place). The rest was a function of vacancy: either vandalism or simply weather damage like frozen pipes, green pools, brown lawns, etc.

So I'm a touch skeptical about the claim that 50% of REO has "substantial damage" and most of that is willful trashing of the property. It would have been nice for the reporter to supply the details here. I became even more skeptical when I read this:
Lenders see cash for keys as a small price to pay when compared with the cost of repairs. Indeed, the price impact when people damage their houses can be up to 25% of what the home is worth, according to Campbell Communications. (That means a $400,000 home's repairs might cost around $100,000.)
I freely admit it has been a while since my wrinkled reptilian snout has had to read a lot of detailed repair estimates. However, I think I need someone to explain to me how anyone can do $100,000 worth of damage to a three-bedroom two-and-a-half bathroom home with doors that are not wide enough to admit a backhoe. I suppose it's possible, but can the average repair bill be even close to that?

Then there's this:
How many people are biting?

It depends. Cash for keys is not always considered a bargain by homeowners. Losing their home and credit is a heavy burden.

"Most people don't want cash for keys," says the researcher Popik. "They want their credit ratings to stay intact."
Having been assured by all kinds of people that homeowners are just ruthlessly walking away, I'm struggling with the idea that they're too pissed to collect an extra couple grand for the keys. They'd rather "mail them in" and get nothing? Because this might have something to do with their credit ratings? They really think they can make more than $3,000 net ripping out the furnace and selling it on eBay? That's easier than taking a check from the servicer?

My theory is that whenever the emerging popular narratives are this contradictory--homeowners are cold and calculating enough to just walk away from an upside-down investment, but they are also emotional and irrational enough to prefer the revenge of knocking holes in the drywall to getting a check to cover moving expenses; they can afford their mortgages but choose not to pay them, but they also can't afford basic maintenance before the foreclosure; they care about their credit ratings except they don't care about their credit ratings; they are the victims of servicers who won't answer the phone, but they are also bitter people who thumb their noses at a generous check the servicer is offering--we have an excellent opportunity to recognize that:

1. The category "homeowner" is extremely diverse.

2. All kinds of people do all kinds of things for all kinds of reasons, not all of which are obvious to anyone including the people who do these things.

3. Any discussion of "psychology" that assumes a universal, perfectly consistent and easily-predictable human response to falling home values or foreclosures is not a very sophisticated understanding of human psychology (Hi, Dr. Shiller!).

4. Any argument about "bailouts" that seems to depend on characterizing all homeowners in the same way, and imputing to them all the same experiences and motives and the same responses to incentives or disincentives, is not worth listening to.

5. I wouldn't hang a dog on the basis of a survey of real estate agents at this point.

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