- Written by Ralph Roberts
March 16, 2009
Realty Times
How Much Does a Foreclosure Cost?
Plenty of people are concerned about the cost of bailing out Main Street - the people who stand to lose their homes in the midst of the current financial crisis. Many feel that it's not the job of the federal government to bail out homeowners who cannot afford their monthly mortgage payments. After all, those people took out risky loans. They are the ones who signed the loan documents. They are the irresponsible borrowers running this country into the ground.
For a moment, let's ignore the question of who's at fault. There's plenty of blame to go around. For now, let's consider what it costs when homeowners are allowed to lose their homes to foreclosure and who ends up with the bill.
According to a report by the Joint Economic Committee of Congress, the average foreclosure cost amount to about $151,000, with several parties picking up the tab:
- Homeowner: $7,000
- Lender: $50,000
- Local government: $19,000
- Impact on neighboring home values: $75,000
- Estimated total cost of one foreclosure: $151,000
This doesn't even account for other potential costs, including the cost of lost productivity, a reduction in a family's purchase power, lost federal income taxes, and the emotional and psychological costs of losing a home and losing friends and neighbors.
Although neighboring home values usually take the biggest hit as a group, the lender stands to lose the most as an individual party. The Mortgage Bankers Association (MBA) released a policy report in May, 2008, in which it supports the fact that lenders are often the biggest losers in foreclosure: "While losses can vary widely, several independent studies find them to be generally quite significant: over $50,000 per foreclosed home or as much as 30 to 60 percent of the outstanding loan balance."
Multiply these losses by the estimated 250,000 homeowners who are likely to lose their homes to foreclosure every three months, and we're looking at over $120 billion in losses annually.
Now, bailing out Main Street doesn't seem like such a costly proposition. In fact, not bailing out Main Street could be the most costly option of all.
Written by Ralph Roberts
March 16, 2009
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