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Housing: The Fine Print in a Tale of Woe

The housing market remains deeply troubled, with more than 800,000 homes on their way to foreclosure or in the process of being auctioned, according to RealtyTrac and Moody’s Analytics. That’s part of the reason the economy isn’t growing fast enough to put many of the unemployed back to work.

The Obama administration has launched several efforts to avert foreclosures and stop the slide in property values, under the theory that investors will come back into the market once it’s clear that prices are heading up again. But none of those initiatives has lived up to its billing. Some analysts blame the banks for dragging their feet; others blame the administration for putting too many restrictions on the aid.

The larger truth, though, is that troubled borrowers’ situations are more complicated than they might seem. A good example is provided by my colleague David Lazarus’ column Tuesday about a couple in Downey who fell behind on their Wells Fargo mortgage while one or both were temporarily unemployed for several months last year and early this year. By the time they were both working and eager to start paying off their debt, the bank was no longer interested in working out a deal, and it moved in June to foreclose.

The bank’s treatment of Jackie Durra and Pedro Balladeres was hard to justify from a pure business standpoint. Given the couple’s renewed ability to make mortgage payments, Wells stood to gain more if Durra and Balladeres stayed in their home than if it repossessed and sold the place. The bank eventually came around to that point of view, telling Lazarus that it’s now working with the couple to avoid foreclosing.

Nevertheless, one graf in the story jumped out at me:

Durra bought her three-bedroom house in 2001 for $280,000. After a second mortgage was taken out several years later, the total outstanding loan balance was about $375,000. The real estate website Zillow estimates the current value of the property at $348,300.

In other words, the couple took a significant amount of cash out of the home during the housing bubble, piling on more debt. Had they not done so, they wouldn’t have been in such a vulnerable position when the bubble burst and the economy collapsed.

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