Mark Gimein reckons that a foreclosure on a subprime mortgage isn’t as bad
as a foreclosure on a more traditional mortgage, because he’s been reading about
subprime borrowers going into foreclosure, and "almost without exception
the borrowers the stories cite put zero down on their homes". He
continues:
Losing your home sucks no matter what, but it sucks a lot less if you didn’t
need to put any cash down to buy it.
If you put down nothing on a house, that doesn’t mean you’re willing to lose
it. But it’s just not the same as losing both your house and your life’s savings
with it. Lose a house on which you’ve put zero down and you’re back where
you’ve started. It’s "foreclosure lite."
I know some people will say, "But your credit record is ruined."
And indeed, for some years it is. But these days having a bad credit record
means you’re just in pretty much the same boat as people with good credit
records were two decades ago: instead of being able to get a house with 5
percent down or zero percent, you need to actually have a down payment of
20 percent.
Let me explain to Mark why he’s wrong, and why it does not "suck a lot
less" to lose a house on which you’ve put no money down.
- Yes, you do lose your life savings along with the house. Most subprime
mortgages are refis, which means that very few of them are non-recourse: just
because you lose your house doesn’t mean that you don’t still owe money to
the lender. When you go into foreclosure and/or bankruptcy, you will
lose all your savings as the lender tries to recover as much of the value
of the loan as possible. Remember that it’s the homeowner, the individual,
who owes the bank money: a mortgage is a personal debt.
- In any event, it’s dangerous to generalize from anecdotes. You might have
heard of subprime foreclosures where the buyers put no money down; I can assure
you that there are many others where life savings did get put into down payments.
- And no, you’re not back where you started after a foreclosure, even if you
did put no money down. When people buy a house, they generally spend a large
amount of money on lawyers’ fees, brokers’ fees, surveyors’ fees, furnishings,
movers, interior decorators, architects, contractors, appliances, and dozens
of other "one-off" expenses. That’s very real money down the drain
if you lose the house entirely.
- Yes, if you have ruined credit, it might still be possible to buy a house
with 20% down. But you’ve lost your life savings, remember? Where are you
going to find that down payment? And, more to the point, where are you going
to live in the interim? Few landlords are going to want to rent to you with
that credit rating. It’s not uncommon for people thrown out of their houses
to find themselves unable even to sleep in their cars, since the car, too,
has been reposessed.
Mark is living in a fantasy world if he thinks that many people are going through
some kind of "foreclosure lite". It’s possible that some real-estate
speculators might find themselves in that position, if they never moved in to
the house they bought. But for real people with one home, foreclosure is a terrible
thing, and it’s just as terrible no matter what kind of mortgage they have.