When Kids Lose Their Homes

The ABLJ just published a new paper, Parents in Financial Crisis: Fighting to Save the Family Home.  The paper uses data from the 2001 Consumer Bankruptcy Project to examine the differences in how hard people struggle to save a home based on the presence--or absence--of minor children in the house. The data support the claim that families with children work harder to try to hang on to home both before and during bankruptcy.  The finding is consistent with the thesis that families buy homes as a way to buy opportunities for their children (schools, neighborhoods) and that the potential loss of a home is more painful to parents who fear the lifetime impact of the loss on their children.

The data pre-date the current mortgage crisis, but they are useful on several levels for thinking about what is happening now. At one level, the data reported in Parents in Financial Crisis are a reminder of the impact of a wave of foreclosures.  For adults to pick up stakes and move to a rental in a less desirable part of town can be painful, but they can go to the same work every day and continue the same after-work activities.  For a child, however, foreclosure may mean transferring to a weaker school, losing a chance to play in the band or on a softball team, dropping out of a scout troop, and losing all the friends she has ever known.  Sure, we're a highly mobile society, and children move all the time.  But a move to a nicer house or a move so mom can take a better job is a move that most parents undertake at least in part with an eye toward improving a child's lifetime chances. A move from a foreclosure is not a move up.

The paper is written by Eric Nguyen, a Harvard 3L with a strong quantitative background.  (Note to entry level hiring committees: Remember his name--he's very good.)  Eric had read The Two-Income Trap and pointed out that if we were right about families and homes, there should be a difference among bankrupt families between home-owning parents and home-owning nonparents and the lengths to which they went to save their homes. He dug into the data on his own and found some very interesting correlations, all pointing in the same direction.  The data show that among economically distressed families, and controlling for household income and several other factors, those with children were nearly twice as likely to scramble to hang on to their homes than those without children.

The paper is a powerful reminder of the urgency of dealing with the current housing crisis. Several million kids will be affected by the outcome.

Comments

[bailey]

Should the families be entitled to stay in houses where parents "bought" putting no money down & fibbing about their earnings? Any resolution to the housing crisis (it certainly is reaching this in the Bubble states) MUST be resolved on a house by house, borrower by borrower basis. To say this can't be done is ludicrous, it's how we got into this mess. Further, to place children in front of the parents in this "war" is unfair to all the responsible parents who didn't massage the truth and gamble wildly while putting their kids in this position.
I'm sorry if I appear callous but we have an entire generation of young adults anxious to start families & buy upscale homes up who will never get an opportunity to do so if home prices are not allowed to revert to their historical growth rates. Let's not fix one problem by creating a larger one. These responsible, thoughtful & caring parents could well be our future community & school leaders.

[Patche]

He should try a little fieldwork.

Just this Friday I had a woman in tears in my office because there was to way to save her home even in a 13. Here husband was incarcerated and was going to remain so for quite some time to come. She had recently taken on a job that paid decently though her monthly income alone did not even come close to her monthly mortgage payment. Her kids (all 4 of them) had been going to catholic school ever since they could remember and now with a pending foreclosure would have to start public school and possibly living in section 8 housing. What almost brought me to tears was that ever since their dad had been “sent up”, all 4 kids were staying in their moms’ bedroom every night. She was doing her best to shelter those kids but thru all of her efforts, she could not. I spent an additional 20 min trying to encourage her and I tried to point her to specific programs that might help. There was nothing that we could do to save that home. It was just too far-gone and those monthly payments were just too high for her alone. Those kids are going to suffer another loss but a home and not their father this time. Not justifying “his” actions but just showing another variable in that "two income trap" and the effect on the children. I gave her my "stubborn horse" speech. She left encouraged but she had a lot of heart ache in front of her.

I love helping people save their homes and helping them when they are working out their debts in Bankruptcy but I hate….HATE.. having to honestly tell someone especially someone in that situation that there was nothing that we or she could do to save that home and thus avoiding everything else that goes with the foreclosure. My heart breaks just writing this down. Hope this helps someone somewhere, somehow.

It is my experience that homeowners with children do try harder to keep their homes. I see it daily in Chapter 13s. I can compare and contract because not only in the past I have seen this.... This Friday alone I saw the contrast. The lady above that I talked about and another man (single) who also came in Friday. I told him he might have to surrender his home. It was no sweat off his back and he also laughed about it. Debtors with children will do almost anything to shelter their kids.

[davis]

@bailey: Yes, but what entitles those "young adults" to the ability to buy a home at a price the market will not bear? While I agree with the substance of your post--the market will ultimately correct to the proper amount--the entitlement that goes along with it is startling, and I *am* a young adult with a small family who'd like to buy an upscale home. However, there's a reason categories of houses such as "starter homes" exist; you buy small, save, grow and then buy bigger or better or smarter. What used to take 20 years to accomplish is now being done in five or less with the (continued) existence of "creative mortgages" and low down payments.

Ultimately, one class of buyer cannot be favored over another. However, we cannot wreck an entire economy or entire communities just because mortgage lenders and brokers were shady. There must be a middle ground, and a case-by-case basis is the only way to find it.

[bailey]

Davis, What used to entitle first-time buyers was their attractiveness as a borrower, whether they be starting-out Doctors with mounds of debt but also huge earnings potential, or as it was with most of us - a down payment it took years to save & credit/earnings history likely to offset the risk of default. It wasn't creative mtgs. that changed this, it was who these mtgs were "given" to.
And, it should be noted, it didn't just happen all of a sudden that anyone could get a "funny-money" mtg. without a clear line of accountability as to whom to call if (when) the "funny-money" loan failed. Back in "03 Greenspan likened the new "ownership society" home buying business model to the banking system - it would work fine as only very few would want to cash out each year. Trust me, he was fully aware at the time that what makes our banking system sound is Uncle Sam's good word. Why didn't demand at that time for someone to lender of last resort?
How this is playing out is certainly not a surprise to those who paid attention. Progressive Economist, Dean Baker (who took the time & effort to appear on "Boskin" & "Glass-Steagall" wrote clearly & consisely on the topic way back when any of many could have prevented the horror we face. It is not a coincidence that Greenspan led the efforts to pass both. But, that's history.
What I find appalling is that we're largely left looking for answers from the same self-interested whims of the same same power structures who created the mess. Worst among these, imo, are our most notable Macro-Economists who sat silent during the Boskin Hearings (to lower our readings of inflation) and the Glass-Steagall Hearings (to deregulate our money center Banks without calling for single body regulatory oversight). Not far behind are tenured Academics & Gov't bureaucrats, shielded from the harsh reality of funding retirement when we are seeing inflation everywhere but wages.
Sure it's tough on honest, hard-working stiffs who've been caught, just like it's hard on the 1% of families who are personally paying dearly for Iraq, and it's hard on the elderly poor who are being cheated by our Gov't readings of inflation.
But, it sure sounds from Patche's comment, that family should never have been approved. Without looking to the loan docs, we're turning this into a political party debate, it deserves better. Is it fair for taxpayers to subsidize homes for 1-2+ million families without anyone caring enough to qualify the merits of the claims? This is just an absurdly disguised misdirection for political gain & I think we deserve a better, tighter argument from our best & brightest in defense of our needy.

[Patches]

I am stuck in the market, looking but not able to find anything decent because of all the easy credit. Been there still doing that! As time passes the choices get better and better. But the family I talked about could afford the mortgage they were given, based on two incomes but when one is taken away and people live paycheck-to-paycheck it can go down hill right away. (ref."Two income trap”) It was a conventional loan and when I told her about FHA and HUD mortgages she looked at me with a look of disbelief. When I told her that if she saved up and improved her credit, she would only look at 3% down and might qualify for down-payment assistance, her eyes lit up behind those tears. She felt hopeless because she didn't know any better. She, besides the home, had very little debt and I suggested that if she gave up the home in lieu of foreclosure and not file Bankruptcy she may very well keep intact a decent (but not grate) credit history. She would have to take a step back in order to take two forward in the future.

Is there a panacea? I don't think so. An individual look at each situation, I think is prudent but it's the only game in town right now. I think, as the authors of this blog have suggested that fixing theses shady loans in Bankruptcy is not only viable but also prudent. If we are talking lending abuses its a good fix. If we are talking debtor fraud, it’s a good fix in that all of that will wash, and the Bankruptcy Judge can exercise his or her "disinherited" "equitable power

[AMC]

"Any resolution to the housing crisis (it certainly is reaching this in the Bubble states) MUST be resolved on a house by house, borrower by borrower basis. To say this can't be done is ludicrous, it's how we got into this mess."

Wha......?

You think the remaining mortgage companies are going to hire sufficient staff to do loss mitigation on a case-by-case basis? There was a profit motive mobilizing the army of mortgage brokers that got us into this mess - there just isn't going to be a similar army of loss mitigation specialists. Pretending that there's any chance that there will be is what is 'ludicrous'.

This mess is going to have to be cleaned up wholesale - or we are all going to have to deal with the perfect storm fallout - cities with falling tax bases trying to deal with the abandoned homes that are fire hazards, crack houses, rat factories, and eyesores pulling down the value of surrounding properties.

The foreclosure crisis today is NOT symetrical with the conditions that created the housing bubble. On the rise, shady lenders and smart property traders made lots of money. On the way down, most of the housing bubble "winners" are long gone. And it is not just the individual homeowners left holding the bag - it is also the communities that they live in that are being damaged, as well as our national economy.

Since the evidence is mounting that the 'voluntary efforts' are not working, and in many cases are little more than a sham, two primary solutions are being offered - 1) taxpayer dollars being used to bailout certain mortgages; or 2) allow mortgages to be treated like other secured debts in Chapter 13 bankruptcy.

I think the second solution makes more sense, and is more likely to be effective. But it would put the cost of solving the crisis on the banks and mortgage companies that created the problem, and they have better lobbiests than the taxpayers.

There is also the problem of determining what people are 'needy' enough to qualify for a mortgage modification in a Chapter 13. And unfortunately, the folks who brought us the "Means Test" apparently never gave much thought to the idea that it would have to serve any real purpose other than as a barrier to bankruptcy relief. So, we have a legal structure for determining 'need' that so poorly thought out (and so horribly drafted) that the mortgage companies know that it is woefully inadequate for the task of determining real need.

Hoist by their own petard. The credit industry lobbied their way into a bought-and-paid-for 'reform' that is so arbitrary they are afraid to risk using it, even though it is really the only way to slow the landslide of foreclosed and abandoned houses coming onto the market. And for want of a competently drafted law that would actually be fair and useful, we are going to have stick taxpayer dollars into the dike and just hope for the best.

[Patches]

Amen.

[bailey]

AMC, I AGREE. But, why can't Gov't., which is now underwriting about ALL mtgs. being written make reasonable demands that private industry conduct itself in the best interests of our majority? For every mtg. & r.e. collaterized company begging our gses & gov't. offshoots buy mtgs. they're originating, packaging & repackaging, why not require they first, demand the loans be full-recourse (so the mortgagee can't walk away on a whim) & second, demand evidence the company is dealing fairly and rationally with other past due mortgagees they're holding to the fire before putting us taxpayers on the hook as they jump off?
Why must we always accept it's big business mandate to privatize profits and socialize loses? I'm not an O'bama convert by any means (so far all I've seen re: his Economic team are one new fringer (Goolsbee) & Clinton retreads), but he's right about one thing - it's time for change.

[Patches]

Change is needed but we also need a fix for right now. It is not coming soon enough! By the time we get a fix, the damage will have already be done. We don't need to see anymore Chapter 9s. The up-tick in property valuations was sickening. When I look at tax appraisals for our 13 debtors I am seeing huge upswings from 06-07. The average is 18k more or less in increased home valuations. The taxing home valuations is like the second shot in a double barrel shot gun. If the teaser rate didn’t get you the increase in taxes will.

A Texas Blogger did turn me on to the fact that you may be able to reverse that home appraisal by the city, county, etc. in Chapter 13 Bankruptcy. The blog is located here… http://stevesathersbankruptcynews.blogspot.com/2008_05_01_archive.html

It is the Wednesday May 21, 2008 blog entitled “Obscure Provision Protects Local taxing Authorities”.

[Patches]

What is up with my word processor?! It’s leaving off letters and words left and right! arrrrgggg! Sorry about that guys and or gals.

[lmclark]

I got to this party late. Just a few thoughts. There is great piece done by "This American Life" (available on NPR) that did a great job of dissecting how we got into this subprime mess. It makes the obvious point that trillions of dollars was looking for a home (no pun intended) and the marketing folks went out a "made product" to feed that hungry monster. Now we have people making the frankly ludicrous argument that its all the fault of the folks who took the money that was being pushed onto them -- certainly not the fault of the "poor lenders" who were pushing the loans. We heard the same sort of moaning from the credit card industry before -- they begged people to borrow, regardless their ability to repay, then whined to Congress they needed protection from the people who had the temerity to take them up on their offer. It is time for us to move past these false shibboleths.

The real story here is that the persons making the loans were not the persons responsible for collecting the loans, so common sense credit extension decisions were no longer made. People took the money -- of course -- because they were told nationwide that home ownership is the key to building wealth, that homes never lose value (we're still hearing that in an ad being pushed by the National Association of Realtors), and that they could alway refinance into a better rate later. At some point, the ones that truly have to be held to account are the ones who lied people into these loans, taking advantage of their lack of sophistication.

But this much I have seen, again and again. When a family loses their home, they often lose their neighborhood and their school district as well. They may find themselves in more dangerous neighborhoods (because now they have to rent), and in poorer schools. Little wonder that families fight to keep their homes.

[Patches]

Imclark-

I agree.