Governments Buy Foreclosed Houses

May 14th, 2008 · No Comments

The Barney Frank mortgage rescue Bill captured the headlines. The House passed quietly another Bill. Questions and doubts are being raised about this bail out Bill. This Rep. Maxine Water’s Bill sanctioned $15 Billion to local governments to buy foreclosed units.

Waters argued that this Bill gives ‘effective and meaningful help’ to those that need it. The support comes timely. The Bill provides of $7.5 Billion as grants and $7.5 Billion as loans. It will be disbursed to states. The guiding principle will be the number of foreclosures and sub-prime loans as well as 90 days delinquency. Furthermore calculations will be made taking into account the average price of real estate. The special characteristic of the Bill is that it expedites the distribution of funds. This speed is expected to pump vigour into the economy.

Furthermore the Bill constraints the use of the loans to buying or paying for foreclosed units for the purpose of resale. The buyers have to use it as place of residence. The income has to be in proportion to the value of the house –“families having income up to 140% of the median income for the area in which the housing is located.” The units will be rented out only to those families whose incomes are not more than 100% of the average price of houses in the locality. The property can be sold within three months of the purchase at a price close to the purchase price.

As per market rules foreclosed houses sell at a correct price; if not then it has to be assumed that the asking price is exorbitant. Allowing local government to buy houses is like granting a gift to the lender in a roundabout manner. The lenders quickly come up with a willing purchaser with cash. It is difficult to believe that the government will go around buying up foreclosed units and not indulge favourites. Questions will lurk about the government being totally above board about inspecting and remodeling for the purpose of selling or renting a lot of damaged houses in a manner that will be done timely and cost effectively.

So far all the steps taken by the authorities at local, state and federal levels have proved to be croppers. Nothing has shown positive results. In the first quarter foreclosures have marched ahead caring little for reins and controls – an alarming pointer to the immediate future.