How harmful are foreclosures?

Wednesday, Feb. 3
Written 8:45 a.m. EST

WALK AWAY, SAVE THE ECONOMY: Economist Dean Baker says you should let your mortgage go into foreclosure if you can't afford the payments. Walking away benefits you (by reducing monthly expenses) and the overall economy (because you'll spend money on other things).

Liberals and conservatives agree on this point. Eventually the folks in the middle are going to catch up.

Baker (who, like me, lives on the liberal end of the political spectrum) takes issue with a New York Times article that says: "doing nothing about underwater mortgages could encourage more walk-aways, dealing another blow to a fragile economy." To which Baker replies: Show me the evidence.

Baker observes that "if people stop paying mortgages on homes that have fallen in value since the collapse of the bubble, and decide to rent instead, it is likely to free up thousands of dollars a year for each family. If millions of homeowners made this decision it could lead to tens of billions of dollars in additional consumption, providing a substantial boost to the economy. The decision of homeowners to walk away might be bad news for banks, but it is good news for the economy."

Now take a look at this excellent analysis by Paul Jackson, publisher of HousingWire. I won't pin a label on Jackson, except to say that I would never call him a liberal. He makes the same point as Baker: "Rather than keeping consumers in homes they cannot ultimately afford, and setting consumer expectations at untenable levels, would we all be better off by simply allowing a foreclosure to happen, thereby putting the consumer in a position to contribute more of their disposable income back into the 'real economy' -- and maybe even boosting consumer spending in the process?"

EMPLOYMENT REPORT: Mortgage rates have held fairly steady in the last couple of weeks. This calm period could come to an end Friday morning, when the January employment report is released. The monthly employment report sometimes is accompanied by rate gyrations. It's possible that mortgage rates will spike or plunge Friday soon after the report is released.

Big rate changes are not a sure thing. Last month, the employment report barely caused a ripple in mortgage markets. But if you need to make a rate-lock decision within the next week, and if you prefer to play it safe, it would be prudent to lock by the close of business Thursday.


Show Bankrate's community sharing policy
          Connect with us

Timely market news and advice for consumers ready to buy, sell or invest in real estate. Delivered weekly.


Greg McBride

Greg McBride: Lay down ARMs?

Don't rule out adjustable-rate mortgages as interest rates rise.  ... Read more

Partner Center

Connect with us