Foreclosure Freeze Is Good For Mortgage-Paying Sellers

The housing market just keeps getting uglier. Now we're learning that not only did banks do a bad job of making loans, they're also doing a bad job of foreclosing on them. So bad that we have a nation-wide freeze on foreclosures. But if you've been paying your mortgage and your house is for sale, the foreclosure freeze just made your house a lot more attractive to potential buyers.

Here's why: Let's assume there are two houses for sale in your neighborhood: your home and a foreclosed home.

Prior to the freeze, a buyer might be tempted to jump on that foreclosed home at a 30% discount to your home. But now, with the foreclosure freeze, the tables are turned:

• First, everything is frozen, so there won't be much sales activity in foreclosed homes for some period of time. That doesn't make pursuing a foreclosed home very attractive. You can't be sure how long it will take and how long your earnest money might be tied up.
  
  • Why is there a freeze? The foreclosure process is very technical and each state and county has its own procedures. If you don't dot every "i" and cross every "t" in the foreclosure process, then you (meaning a bank) may not have legally foreclosed on the home and thus cannot sell it to a new buyer.
• Second, all 50 of the state attorneys general are investigating or suing over mortgage foreclosure processes. It's likely that these lawsuits will drag on for years. This will put a cloud over the entire process of getting clear title to foreclosed homes.
• And third, expect to start reading stories about buyers of foreclosed homes getting notices from lawyers for the old owners claiming that maybe the new buyers don't really own the home. Who wants to spend $300,000 on a new home only to learn that they might not actually own it? And by the way, you probably won't be able to sell that home as long as there's any dispute about your title. It's a total mess, and some honest people are going to get hurt in this process.

All of a sudden, that foreclosed home down the street doesn't seem so attractive. Now let's take a look at your home. You've been paying your mortgage and have clear title to your home. That means as a seller, you can offer a potential buyer a quick closing, clear title, and no lawyers. In economic terms, that makes your home far more attractive than the foreclosed home. It turns out that paying your mortgage has some benefits.

It also makes is easier for you to refute the "comparable" sales figures that some buyers may use to drive down the offer price on your home. If those comparables include prices on foreclosed homes that have sold over the last few years, they don't offer much comparable value when titles and ownership issues are in dispute. If you throw out those sales, the prices for comparable homes will likely be higher because you're only looking at non-foreclosed homes, just like yours.

• Last week I wrote about considering downsizing your home to boost your retirement income. Well, for the next six months or so, this foreclosure freeze might make that a little easier to do.

Bottom line. The foreclosure freeze will make the homes of mortgage-paying sellers more attractive.

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