The Cost of Foreclosure

Way back in December of 2007 when happenstance led me to write a piece about foreclosure clusters, I was interested to learn that foreclosures are bad for everyone who owns a home on the block. It’s not, in other words, really just a matter between a borrower and his bank. Under the circumstances, as Mike at Rortybomb explains there’s something not very pragmatic about the laissez faire approach to home lending:

If I was a degenerate crackhead who snuck into your neighborhood and mugged you for $50, the Wall Street Journal Opinion Page would want me thrown in jail. Now imagine that I’m a degenerate crackhead who took out a subprime loan to move next door to you, in an arrangement that I’m likely not going to pay off. I might not even make one payment. If I default you’ll lose 10% of the value of your home from the externality effect. Assuming your home is worth $300,000, there’s a 20% chance I default in 2 years (realistic numbers), and you lose 10%; 300,000*.2*.1 = I’ve just robbed you for $6,000 while the Wall Street Journal Opinion Page cheered me on. And that’s one house – I’ll have a dozen neighbors. Now mind you, the product was great for me – I got to smoke crack indoors, in a house I could never realistically afford, which was a big plus. The subprime lender sold my loan to a pension fund in Denmark for a nice fee. It goes in the win column for us.

I don’t think the analogy to a mugging works in all respects. Still, I think the main point holds, there’s perfectly good reason to regard the viability of these arrangements as a matter of general social concern and there’s also good reason to want people to err on the side of caution. It adds up to a substantial argument in favor of the idea of a financial consumer protection agency.