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Once upon a time, there was a cute little Spanish style house in a city called Inglewood, California. The people who had owned the house had some trouble after one of them had lost their job, and had stopped making their payments to the bank that loaned them the money to buy the house in the first place. Unfortunately, the contract that they signed said that if they didn’t make their payments for a long time, the bank would pay a lawyer to take their house away and sell it. Well, after about eighteen months of not paying getting any payments from the homeowner, that’s exactly what they did!
After the bank became the legal owner of the house, they went to the people who lived there and told them the bad news. Of course, the people were sad that the bank owned the house now and that they would have to move, but they were happy that the man whom the bank had sent to talk to them was offering them some money to help rent a new house. In fact, the man who came to the house told them that if they moved out in a month and left the house clean and tidy, they would be able to get enough money to hire movers and pay for a new place to live! So they agreed to move out and take the man’s offer…and that’s exactly what they did!
Even though the people had cleaned the house when they left, it had been a long time since anyone had done any kind of routine maintenance to the property. The people who owned it before didn’t have enough money to fix things that were wrong with the house, and hadn’t been able to do all of the things that they had been meaning to do to make it nicer. Also, even though it was really cute and the neighborhood pretty good, some people had broken in and vandalized the rooms. They had even broken the pretty fireplace. Since people don’t want to move into houses that are vandalized and need a lot of work, investors talked to the bank so they could buy it and fix it up…and that’s exactly what they did!
Having owned the property for about a month, the investors had finally completed all of the rehab and remodeling to the house. In addition to a new coat of paint and new landscaping, they had installed completely new bathrooms and opened up the kitchen. They put in new cabinets and countertops. The contractor that they hired refinished the floors, and even rebuilt the beautiful fireplace. After all of this incredible work had been done to make the house shine again, the investors felt that they could put the property on the market and sell it for a nice profit…and that’s exactly what they did.
Many interested buyers came in to look at the cute little house. All of their real estate agents had very complimentary things to say about the work that the investors had done to the property. In fact, within a few days, several agents had written offers on behalf of their clients to purchase the home from the investors. So after negotiating deal points, like pricing and the length of escrow, the buyer’s agent and the investors’ agent came to an agreement to sell the cute little house. The new buyers moved in, the investors moved on to their next deal, the contractor went to fix up another house, the real estate agents went to work with more clients, the original homeowners found a place that they could more easily afford and they all lived happily ever after.
Many, including the President of the United States, would hold this story up as an example “vulture capitalism” or “vampire capitalism” and focus on the human element of a family losing their home. They would talk about the greedy, millionaire investors making their money at the expense of others, and cite this as a reason why we need to pressure banks to modify loans. Unfortunately, this kind of lack thinking completely ignores the greater economic picture. Although the investors did share net profit in the amount of about $56,000, the contractor, loan representatives, real estate agents, escrow companies, insurance providers, property inspector, termite company, and even the former homeowner (They got three grand) got their share of $81,000. This transaction put $137,000 directly into the economy, and generated about $53,000 in state and federal tax revenue.
With an estimated 10,000,000 American homeowners currently in foreclosure, there is roughly half a trillion dollars of real capital that is not in the pockets of consumers. After factoring in the interest on the $1.5 trillion that homeowners would be paying on new loans, the amount of money sitting on the sidelines is very similar to the president’s stimulus package. When one considers the jobs that this kind of situation generates for a battered construction industry, the overall positive effect on the economy would be simply breathtaking! Housing represents nearly twenty percent of the nation’s GDP, and it’s being held back. By creating programs to help the struggling few, the government has inadvertently prolonged an economy of the struggling many. Although it may sound unsympathetic to the folks clinging to the desperate hope that they may be able to keep their homes, we must allow the free market and the foreclosure cycle to run its course.