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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.

How time impacts foreclosure rationality

May 3, 2011

I was visiting with a real estate attorney this morning. She was writing a story about the industry in terms that her local market could understand. She writes for a newspaper that serves a fairly swanky East Coast community made up mostly of retirees. Many of her readers are likely living in what once were their vacation homes, most of them paid off.

For people who grew up in the '50s and '60s, the worked hard all their lives — many in the same jobs for years at a time. They made their investments with the intention of holding them for the long term and paid off their homes over 30 years. For them, the housing crisis must seem somewhat confusing.

Speaking generally, older folks who own their own homes have a history of making decisions with the longer term in mind. They think of investments more like Warren Buffett does. They buy property like it was an investment. It took a long time for these folks to arrive at their swanky retirement home and they made good use of it. They’ve lived their lives with a view to the long term.

Today, time isn’t the coin you use to fill a piggy bank for your retirement. Today, time is money. We move fast today and have for the last 20 years or so.

We use software to make it easier to sell the stock we bought yesterday for a quick profit. We like to flip properties for quick money and if we live in the home, we’re always on the lookout for a chance to refinance our home into something that looks like a better loan.

We live for the short term and make many of our decisions around what is best for us now.

I could talk about how I don’t believe this behavior is instinctual in humans and how a free market economy has bred us to be this kind of constantly moving consumer, but I’ve covered that in previous columns. And it doesn’t matter why we are this way. What does matter is the impact this type of short-term thinking has on the way we make decisions.

My grandmother (who turns 90 this month!) wouldn’t see the sense in this foreclosure crisis. Are they paying their mortgages as agreed? No? Then foreclose. That’s just the way things were done in her time. That was rational decision making back in the day.

Today, it’s a bit more complicated. Ask a foreclosure attorney what a mortgage is and he’ll probably tell you that it’s a very complex set of contractual documents and disclosure forms that must be combined and executed in a manner that is fully compliant with a mind-numbing array of local, state and federal regulations. Get any piece wrong and the mortgage is invalid.

At least that’s what he will try to convince the judge to believe. Not because it’s in the best long term interest of the borrower (who will likely lose the house to the attorney as payment for fees), the other homeowners in the neighborhood, the industry or the nation’s economy, but because it’s in the attorney’s best interest in the short term.

Normally, a good judge would look at that and decide that the parties to the agreement sat down in good faith to execute a deal which required the borrower to pay back the money. If the borrower fails to do so, foreclosure results. But that would require the court to have time to think through each case.

The Florida rocket dockets are the most extreme example, but they are not that different than foreclosure courts in other states. Decisions are being made quickly. Not all of them appear rational to those who have more time to contemplate them. It’s short term versus long term.

And it’s not just the default process. The huge shadow inventory, which appears totally irrational to many, becomes clear when the reporter understands the short term impact of selling properties in a down market and taking immediate writedowns to the bank’s balance sheet. The long term good is secondary to the short term good.

It’s a tradeoff we’ll continue to deal with as we work through this downturn. It won’t help the recovery along any, but it is comforting to know that the world hasn’t gone mad; people are just acting in their own short term best interest.

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