Moving down: a way to avoid foreclosure

People with the means to do so move up the housing ladder, trading in smaller, less expensive places for larger, better-equipped ones that are perhaps even in a better neighborhood.

So why shouldn’t people who no longer can afford the house they live in be able to move back down the ladder, replacing -- but not displacing -- a family that is having money problems of its own?

And why shouldn’t the second family be able to step down itself, replacing yet another financially troubled household farther down the housing ladder? Better yet, why not continue this scenario until just one family -- the one all the way down on the bottom rung -- has to find alternative housing?

These are questions posed and answered, at least theoretically, by Michael Zelin, an adjunct professor at Kent State University, who calls his idea to solve the foreclosure crisis “balancing dreams with means.”

Zelin’s is a systems-based approach to a problem currently addressed only piecemeal by each individual lender or investor.

Will his rather novel idea fly? That’s anyone’s guess, because right now that’s all it is -- an idea. The educator has bounced it off a few lenders who say they like it. But they don’t want to be the first bank on their block to give it a whirl.

But if someone doesn’t give Zelin’s plan more than a cursory look-see, there might be millions of people out of their homes. Whereas under the professor’s dreams-versus-means approach, only a fraction will no longer be homeowners.

Estimates suggest that as many as 3 million owners are likely to go under this year alone. Undoubtedly, many will move in with other family members, or if they are lucky and a prospective landlord doesn’t look too closely at their credit reports or doesn’t mind renting to someone with a foreclosure on their records, they might get an apartment somewhere.

But there is solid evidence that foreclosures are a major factor in a rise in homelessness. In a recent survey of 178 local homeless-service providers by a coalition of housing groups, 4 in 5 said at least some of their clients were homeless because of foreclosure, and 1 in 5 estimated that more than 40% of their clients became homeless because of foreclosure.

Even with government programs in place to stem the tide, too many borrowers crying for help go begging. They’re put on hold for hours. Their calls aren’t returned. They’re shunted from one person to another to another. If they aren’t yet in straits, they’re told to call back when they are closer to the brink. If they present a bank with a buyer who is willing to take their houses off their hands, albeit for only a portion of what they still owe, it takes weeks and sometimes months to get an answer.

It is in this context that Zelin’s idea is being floated. After all, he says, “people do exactly what I’m proposing anyway, but they do it in a nonsystematic way.”

Take the case of three troubled homeowners: For simplicity’s sake, one borrowed $200,000, the next borrowed $100,000 and the third, $50,000.

Statistics show that a lender loses about half of the original loan amount in a foreclosure. So if all three borrowers are foreclosed upon, the lender would lose $175,000, and the borrowers would lose everything -- their down payments plus every dollar they’ve paid to reduce their loan balances.

Zelin’s solution gives all three borrowers an option. Instead of losing their houses in an adversarial legal proceeding, suppose they deed them over to the lender and move down in lock step into properties each can afford?

The $200,000 borrower is given the choice to move into the $100,000 house, and the $100,000 borrower can move into the $50,000 house. Only the $50,000 borrower is foreclosed upon, cutting the number of proceedings from three to one and cutting the lender’s losses from $175,000 to $100,000.

Granted, there are a number of issues with the dreams-versus-means concept that still have to be worked out. Right off the bat, it’s obviously going to require a lot of coordination. That’s why Zelin believes it’s a great way for each lender to deal with its own portfolio of delinquent borrowers.

Another rather evident issue is that the person at the bottom of the scenario is as likely as not to be a minority in a poorer neighborhood. So it’s likely the concept will be viewed as discriminatory.

But that family could end up in foreclosure anyway. And if the lender had a sufficient number of homes that it had already taken back -- as most do -- maybe the family could rent one. That certainly would help cut into the lender’s inventory of real estate owned. And that family would still have a roof over its heads.

Why would borrowers accept a trade down as a solution to their miseries? After all, who wants to move down?

But their other choice is to lose their house and end up with nothing. At least under Zelin’s scheme, they would not only be given a new mortgage that they could handle, but they might also be given credit on a prorated basis for the money they’ve invested in the house they are giving up.

“People who lose their houses lose everything completely, and they still need to live somewhere,” Zelin says. “Trading down into a more affordable property is simply more rational and prudent.”

Zelin sees his approach as the lesser of two evils. “It may not be a desirable choice, but it may be the least undesirable,” he says. “It is an attempt to balance borrower means with borrower desires, as well as to minimize their losses and those of their lenders.”

lsichelman@aol.com

Distributed by United Feature Syndicate.