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.
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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