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BANKRUPTCY AND FORECLOSURES ARE NOT NEW

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

FORECLOSURE AND BANKRUPTCY
Sure, we hear about it a lot these days.  But, are there really more foreclosures than in times before?  I don't really believe so.  I believe that we hear and read more about foreclosures and bankruptcies these days with Internet blogs, forums, news articles and web sites advertising "Bad credit? - No problem".   Fact is, bad credit IS a problem.

WHAT IS CAUSING THESE FORECLOSURES? 
In my opinion, the cause of foreclosures today is no different from the cause over the last 30 years, which is, home buyers who do not have discipline and an interest in maintaining a good credit rating.  With the exception of medical emergencies, rare these days with insurance, I do not believe that foreclosures are caused by forces out of the home owners' control.  I believe that foreclosures are caused by defaulting home owners who do not plan for home ownership, do not budget for home ownership and do not set a high priority on a good credit rating. 

WE WENT THROUGH THE SAME THING IN THE 80S AND EARLY 90s.  Folks purchased homes with little down payment and when the mortgage payments increased, they couldn't make the payments.  In those days, it was the simply 1 Year ARM that they used to borrow to their limit.  That 1 Year ARM would go up 2% after 12 months.  Then, that loan would go up 2% the next year and the next.  Those loans could go up 6% in 3 years.  These interest rate on loans that started at 6% for the 1 Year ARM were, 3 years later, 12%. 

We don't see many of these loans today because consumers are offered better options today, the 3, 5, 7 Year ARMs are much easier on borrowers.  Even without much of a down payment, folks have several years in which to adjust to the new mortgage payments before they are faced with an increase in mortgage payment.  Unless a home owner takes a 3, 5, 7 year nap, these higher payments do not come about suddenly.  The loans take time to balloon and come due or convert to a shorter term loan with a higher payment.  Many of the home buyers who use these loans have very high incomes and low savings.  The mortgage interest deduction is a prime motivator for home buyers. 

WHAT ABOUT THE PAYMENT OPTION ARMS?
What about them?  They are not new.  We were using the Great Western program with 3 payment options back in the late 1980s and early 1990s with 40 year amortizations.  I used this loan when I purchased a property in 1990.  Great loan.  The negative amortization is an OPTION, not a requirement as the media would have us believe today. The real estate media is blaming these loans on the problems that a lot of buyers are experiencing today.  I don't believe it.  I think the print media are simply using these loans to sell articles. They are NOT new.

WHAT ABOUT THE INTEREST ONLY LOANS?
What about them?  In a market where appreciation is low to modest, these folks will not have a problem refinancing out as long as they don't spend their equity.  These "interest only" First Trusts with Equity Line 2nds are very popular.  Again, as long as the borrowers make regular payments and don't borrow against their equity balance, they will not have a problem. 

WHAT ABOUT LOW DOWN PAYMENT LOANS?
What about them?  Traditionally, lenders have been protected by requiring a down payment of 10%, 20% and financing the balance for 20-30 years.  However, unless a family is moving up and selling a home that has equity, it's very difficult for buyers to save sufficient cash for high down payments.  However, as long as payments are budgeted and made timely, there is no risk to the family's financial health.

DON'T SPEND THE EQUITY
Folks get in trouble by borrowing against equity to pay for consumer goods, automobiles, luxury items that are not deductible.  If, when the home loan was originated, the borrowers lenders ran ratios to tell these borrowers what could happen if they "spent their equity", perhaps fewer home owners would use home equity to buy vehicles and other discretionary goods and services. 

                               Taking a vacation

NO PROBLEM, HONEY, WE CAN PAY FOR THE TRIP TO THE BEACH FROM OUR HOME EQUITY LINE.

NOT MAKING PAYMENTS TIMELY
If I've heard it once, I've heard it a thousand times.  "If your payment is received more than 15 days late, there is a 5% late payment penalty".  STOP SAYING THAT! !  A better statement would be.  Make your mortgage payments on or before the due date.  Once you are one day late, the clock is running.  Where do people get the idea that there is a "grace period"?  There is a due date by which your payment should be received by the mortgage company.  This is responsible budgeting.  Making payments after the due date is inviting disaster and evidence of irresponsibility.  The borrower who pays their mortgage payment every month on the 28th and pays the late penalty is on the way to foreclosure or bankruptcy. 

DON'T BELIEVE THE MEDIA WHEN THEY ADVISE THAT YOU CAN NEGOTIATE WITH
YOUR CREDITORS. 
In theory, it is possible.  However, when you have late payments, the creditors are not interesting in negotiating.  Sure, they may give you a one month period without a payment, but, they will then raise the interest rate on your cards.  Credit card companies LOVE folks who make late payments.  It's money in the bank for them.  When credit card holders use their credit card to pay for groceries and then make the minimum payment late and pay the late fee, that is a debtor on the way to foreclosure or bankruptcy.  Media people should not be permitted to give false hope to borrowers or credit card holders.

Bryant Tutas has a wonderful article today Three Blind Mice  with real life examples of home owners who have experienced foreclosure, bankruptcy and still don't have a clue.  None of the consumers in Bryant's article were put in bankruptcy or foreclosure by any force other than their own lack of understanding of lending guidelines, budgeting or anything remotely related to the real world of home finance. 

FORECLOSURE AND BANKRUPTCY ARE NOT NEW.  THEY JUST GET MORE ATTENTION.
The scenarios related in Bryant's article are all very familiar to me.  I've been talking to these same folks for 30 years. 

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Comments (25)

Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Forgive me Mikey, but you know a different world than I. 

What is your frame of reference?  Are you a lender, a real estate practitioner?  Or, are you a member of the public? 

If you are a lender, you need to identify yourself so that I can get a bearing on your location, the segment of the lending industry that you represent.  If you are a member of the public, perhaps you should meet a higher quality of lenders.

By posting virtually anonomously, you are not making a contribution. 

My comments are all based on personal experience as a bankruptcy trustee, a title company owner, and a real estate licensee and practitioner over the past 30 years. 

Dec 28, 2006 10:14 PM
Allison Stewart
St.Cloud Homes - Saint Cloud, FL
St. Cloud Fl Realtor, Osceola County Real Estate 407-616-9904

Hi Lenn

You raise as always some good points. Allen raises an interesting point as well. More homeowner over time. There were many people adversely effected by Interest Only Loan programs. When the principal was applied after the two year grace period, many could not make the payments. Interest Only works great, IF you use them as a "bridge loan" to secure fixed rate financing BEFORE the clock runs out. 

Just as a BTW... one of the criteria for applying for government assistance is: you must NOT have paid your rent or mortgage. It is perfectly fine to have sqandered it anyway you choose, but IF you pay or rent or mortgage you will not qualify for food stamps.  That sends an interesting message out- If you used your rent money for food, you run the risk of being evicted. If you cut back on food to pay the rent you do not need help!  Huh?

Dec 28, 2006 10:49 PM
Diane Bell, Hilton Head Real Estate, Bluffton
Charter 1 Real Estate, Hilton Head, Bluffton, SC - Hilton Head Island, SC
Great post.  Over the years, I have been truly amazed to see how some people abuse home equity loans.  Used properly, they are a valuable benefit to a homeowner but surely one doesn't need to purchase a flat screen television, boat or similar.  I have heard of people purchasing cars with their home equities and I'm not absolutely certain how I feel about that.  Their rationale is the tax deductibility.  Oh well, to each his own.
Dec 28, 2006 10:52 PM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

DIANE:  Seems to me that the best use of the Equity Line, Equity Loan, 2nd trust, whatever you want to call it is to avoid PMI.  The lenders prefer to write equity loans these days and they do have a lower interest rate than the average 2nd trust.  But, using equity for auto purchases, etc., is courting disaster if property values fall and a person needs to sell. 

 Lenn

 

 

Dec 28, 2006 11:08 PM
Suzanne Marriott
Keller Williams Arizona Realty - Anthem, AZ
Associate Broker, CLHMS, e-PRO
Lenn - Excellent post - and as you pointed out - it's not the first time we've seen this cycle.  What does the "recovery" period look like for those that go through foreclosure?
Dec 29, 2006 01:39 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Lenn, Mikey is a consumer and hangs around quite a bit. He is trying to learn and will be looking for a Realtor in the S Cal. area later next year. It's a very good thing to have the consumer reading and commenting on our posts. I think he makes some pretty valid points. I too see 100% loans with credit scores at 580. The majority of my deals are zero down. Is that really responsible lending? Could you do that 10 years ago? I think both answers are no. 10 years ago in my market the only 100% financing you could get was USDA Farmer Home Loans. Of course at that time you could buy a house in my area for $60,000. I think their price limitation was $87,500 at the time. We could not do FHA loans in Poinciana back then.
Dec 29, 2006 02:45 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Bryant:  Thanks for the clarification on Mikey.  I appreciate the views of consumers.  However, his impressions of the lending industry are not mine.  I'm afraid that he represents too many consumers who feel the need to "do their own research".  Without the foundatio of real estate training, he's spending time looking for tricksters and misinformation.  That is NOT my experience with 99.9% of lenders.  I've dealt personally with hundreds of lenders over the years and only met ONE who was dishonest. 

Problem is tha bad ones are the only ones that get the publicity.

I still believe that personal responsibility and using the services of an experienced real estate practitioner is the consumer's best opportunity to get the best house for their location and price range.   

 

Dec 29, 2006 03:27 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life
Good post Lenn but I do agree with Bryant to a large extent.  While we have become a society that largely lacks personal responsibility which Lenn astutely points out, the real estate community is not out of bounds as a scapegoat.  Be it misinformation, fraud of some sort, lack of educating the consumer, etc....a lot of consumers are being put into homes that may be able to afford now....but not necessarily 3 years from now.  I really think we need more courses in a schools (have you seen the school tax hikes in the Lehigh Valley) that teach courses on credit and homebuying which are truly things that would prepare the young for this great big real world.  I haven't been at this as long as some on here, but I dare say it is easier to buy a home now with no money than it has ever been.  I have mixed feelings on that.  I should also point out that many consumers have used their homes as ATM machines and I think our use of credit now is much more dangerous than it was years ago.
Dec 29, 2006 03:34 AM
Blanca Cholewczynski
U - Oak Brook, IL
XCO

Lenn, I was a loan processor and for the majority of those years I saw many consumers being encouraged to purchase homes with zero money down, with a 65% Debt to income ratio, low credit scores and no reserves.  I felt back then that is was not in the best interest of their clients, but as a little person in the back room there was not much I could say. 

Now that I have been originating loans; I lost business relationships with a few real estate agents that felt I was not contributing to fill in their deep pockets.  Because I told them their clients could not afford the house they wanted them to buy.  I had one told me "It is your job to give them loans, saints have never died rich"... Yikes!   

My approach to lending has and will always be very simple; Ask the client what their comfort payment is and based on that number qualify them.  Yes I could have put many clients on some exotic loan program and they could have purchased that home that is 20%-30% higher than what they feel they could afford, but I don't live this clients lives, how do I know their little pleasures habits? Do I really want to make them eat macaroni and cheese for 30 yrs? Or Do I care that some day they may have to be forced out of their homes due to foreclosure?  Even better; would I go there to help them watch their belongings outside their home so that the rest of the neighborhood driving by don't try to see what they can take?...Yes, I have seen that happen next door to my own home.    

I don't think any of the loan programs mentioned above are really that bad, they have been created for specific segments of the population; they are not for everyone!  I think is when you combine a deep pocket greedy originator putting people on these types of loans without any regard for these people's future with the immediate gratification need that some of these buyers have; that creates the right recipe to financial disaster in any era.

I think as consumers we need to start taking responsibility to find the right information, to read the fine print, to make the right questions and to demand more from the professionals we choose to work to help us with our financial decisions.   And us as professionals we have the moral responsibility and unique position to advise our clients in those financial matters, before looking into our own pockets. 

Sorry for the big sermon...but I couldn't help myself. 

Dec 29, 2006 03:57 AM
Jason Sardi
Auto & Home & Life Insurance throughout North Carolina - Charlotte, NC
Your Agent for Life
Well put Blanca!
Dec 29, 2006 04:09 AM
Anonymous
Mikey

Lenn I'm not sure which numbers I can post that would sway you, I just have so darn many. When I thought, "hey maybe I'll buy a house", what started me down my path of "wow, this is crazy" WASN'T housing prices (believe it or not, and I live in So. Cal.) it was a broker telling me how much I qualified for. Fundamentally I knew what he was telling me was "wrong".

Tell you what, I will just leave you with no numbers and give you the excitingly titled "Interagency Guidance on Nontraditional Mortgage Product Risks" . It doesn't talk about the number of nontraditional loans in the marketplace, instead it is the governments response to the new underwriting standards that have shown up in the last few years.

To summarize: Your original blog post was saying that all these products have always been around, my counterpoint is that they have never been so widely given out by banks in any time in history to anyone who might want a loan whether qualified or not.

p.s. If you want some fun go take the time to find the "rate sheets" of various lenders and learn what everything on that sheet means. I think you will find it quite eye opening.

Dec 29, 2006 05:37 AM
#16
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Mikey

Thanks for your comments and I surely wish you well when you decide to take the leap to home ownership.  I can only relate my own experience buying and selling homes for the past, shucks, you don't have to know how many years.  I have been engaged in the real estate industry for 30 years.

I work within the industry from a position of knowledge and experience.  Believe it or not, I can read a rate sheet although with credit scoring today, the rate sheets are a thing of the past except for "door-to-door" lenders who visit brokerage office and offer services to inexperienced agents.  I do, however, read the wholesale sheets from time to time. 

Homebuyers who work with our agents or myself get fair rates and terms and conditions.  That is, of course, those buyers who believe that they know more than we do and wish to do it themselves.  They usually pay more than they should with terms and conditions that I wouldn't have for myself. 

Good luck.

Lenn

Dec 29, 2006 08:27 AM
Anonymous
Mikey

Rate sheets are a thing of the past? Hmm: http://www.mlnusa.com/brokers/non_tools_rates.htm

Perhaps your wholesale sheets are the same thing as to what the brokers call rate sheets?

But, again, to the main point, do you not believe that extremely lax underwriting (historically lax in fact) has happened over the last few years?

 

Dec 29, 2006 09:07 AM
#18
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Mikey

No, I really do not.  There were underwriters 20 years ago that could would approve loans if the buyer was willing and able to pay sufficient points or sufficient junk fees.  We always knew who they were.  I believe that underwriting GUIDELINES have been changed to permit for higher LTV for borrowers based on a combination of the credit scores and little else. 

History shows that borrowers with high credit scores WILL make their mortgage payments.  Lenders approve with very high ratios based on credit scores.  This isn't lax underwriting.  This is, I believe, a reflection of changing underwriting guidelines.  We see buyers approved with ratios in the 50-60% that never make a late payment.  That said, there are, no doubt that some folks default.  But, then, they always have and always will.

I simply have a more positive view of lenders than others.  Perhaps because I watch them closely and continue to use good ones that I trust with my own financing. 

Lenn

Dec 29, 2006 09:47 AM
Anonymous
Mikey

http://www.fdic.gov/bank/analytical/regional/ro20062q/na/2006_summer04.html

Maybe if you won't believe me, you will the federal reserve.

"Nontraditional loan products can be appropriate for financially savvy borrowers with low credit risk. Indeed, many of these products have been offered for years to such borrowers, and credit quality generally has been good. What has changed, however, is how these loans have been marketed and used in recent years. Lenders have targeted a wider spectrum of consumers, who may not fully understand the embedded risks but use the loans to close the affordability gap."

"Since 2003, strong home price appreciation and declining affordability have helped drive growing demand for nontraditional mortgage products that can be used to stretch home-buying power. Aided by new computer models and an easing in lending standards, many lenders have accommodated this demand by expanding the variety of nontraditional mortgage products offered while also extending loans to borrowers with less-than-stellar credit histories. As a result, by 2005, nonprime lending, comprised of subprime and Alt-A (low- or no-documentation) loans, accounted for about 33 percent of all mortgage loan originations, up from almost 11 percent in 2003"

"As recently as 2002, IOs and pay-option ARMs represented only 3 percent of total nonprime mortgage originations that were securitized. However, the IO share of credit to nonprime borrowers has soared during the past two years to 30 percent of securitized nonprime mortgages, while the pay-option product jumped to a similar share in less time (see Chart 3). Furthermore, the low- or no-documentation share of subprime lending has grown significantly since 2001, from about 25 percent to just over 40 percent."


"Analysts are concerned that higher-risk borrowers are more likely to be affected by a major payment shock during the life of their mortgage and may be more likely to default. Compounding this possibility is the fact that the increasing availability of mortgage credit is occurring at a time when mitigating controls on credit exposures have weakened. Evidence of loosening underwriting standards was noted in the Office of the Comptroller of the Currency's annual survey of credit underwriting practices at nationally chartered banks.15 A telling result of the 2005 survey was the significant extent to which banks had relaxed underwriting standards for home equity and first mortgage loans (notably, the first time in the survey's 11-year history that a net easing has been reported) by allowing lower minimum credit scores, reduced documentation in evaluating the applicant's creditworthiness, and simultaneous second-lien mortgages.

As a result, risk layering appears to have become more prevalent. For example, there is growing evidence of nonamortizing IOs and pay-option ARMs being made to borrowers with little or no documentation to verify income sources or financial assets (see Table). When one loan combines several such features, the total risk is heightened. The risk compounds in the case of a high loan-to-value ratio of a first-mortgage loan that is combined with a second-lien mortgage because, historically, as combined loan-to-value ratios rise, defaults have tended to rise as well."

 

Dec 29, 2006 10:39 AM
#20
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Mikey.  I understand what you have quoted, which is another way of saying what I said, the 'UNDERWRITING GUIDELINES have changed. 

It isn't that I don't believe you.  Rather, I don't see this as a reason to not buy a home.  When someone understands the mortgage as you do, surely you will not permit yourself to borrow more than you should. 

You appear to have a Doomsday view of the mortgage lending business.  I see the mortgage lending business as a positive force in home ownership. 

 

Dec 29, 2006 11:41 AM
Anonymous
Mikey

Lenn,

I think responsible lending is a positive force in home ownership. I will buy when I see some sort of normalcy return to the market, until then my housing costs are low and my down payment is working for me.

I guess we will wait and see the data that comes out and see who is right because at this point it is a moot argument . Watch the monthly default stats reported by realtytrac (you can wait for the mortgage banker association quarterly numbers, but they are essentially the same just 5 months later) which is rising, transaction volume (which dropping) as to the health of the market. I'll just remember this conversation and bring it up again in a year and we can see who is right.

Dec 29, 2006 03:12 PM
#22
John Sygowski
PRUDENTIAL Holley Properties - Navarre, FL

DON'T SPEND THE EQUITY--- This is my vote for the biggest reason that people get into trouble with their mortgage. They take out a line of credit, pay off credit cards, and then charge them all over again. When they finally realize  that the are on a downward spiral, they want an agent to try to sell the house which by now has no equity left and they will need to come to the table with money after commissions, closing cost, etc.  This is when an inexperienced agent will come in, overprice the house. It won't sell or if it goes under contract, won't appraise. It usually ends up in a foreclosure state, owners are bitter with their Realtor, and the brokerage has spent money on advertising a property with no type of financial gain.

Dec 30, 2006 12:59 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

John

I agree 100%.  With the exception of the rare case where illness, loss of income, etc. are present, spending is the problem.  Exotic loan instruments won't get folks into trouble if they pay what they agree to pay.  Budgeting is almost totally missing from most home buyer's financing profile and savings are another missing element. 

I've had several buyers over the years that sold a home and before they could find the next one, would spend so much of their cash, they couldn't qualify for what they sold the old house to buy. 

Beats me.

Don't get me wrong.  It's VERY difficult to save money with children and today's cost of living.  But, a lot of problems could be avoided if folks would just stop spending on non-essential consumer goods.  Oops, there goes the consumer driven economy. 

Lenn

Dec 30, 2006 01:12 AM
John Sygowski
PRUDENTIAL Holley Properties - Navarre, FL

 

 It's unfortunate when someone has a financial burden that is not in their control. The only good part is that if their credit score takes a hit, it is better taken when additional credit is needed or at least understandable. I guess we all do it to some extent, we just have a better understanding what the consequences could be.

Dec 30, 2006 01:31 AM