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Why did foreclosure rates soar?

This is an expansion on Jaclyn Erwin's blog: Foreclosure Rate Soars: Realtors Can Help!

It was a thoughtful article that gives advice on how to help people avoid foreclosure.

I'm on the other end of that spectrum. I find foreclosures that are done. I don't mess with the courthouse or short sales, etc. I will only look at one when it is in the hands of a bank, HUD, or VA. I don't want to make light of the topic, but for the last 2 years I HAVE BEEN HAVING A FIELD DAY!

Why is this exactly? Is it because there have been a large amount of people that are down on their luck? NO! I believe the reason why can be summed up with 2 words, LOAN FRAUD! During the time that Jaclyn described as a "surge of new homeownership"; there was a surge in unscrupulous lenders and builders.

During that time, HUD made the elgibility requirements a lot easier for a FHA loan, which I believe to be the catalyst of all this.

Many of these people were, uneducated, first time homebuyers that got blindsided by dishonest lenders and builders. They were often lured in by claims such as "Move into this new home today for $XXX, which is less than your rent payment." A lot of these people were barely able to make their rent payments in the first place. They were tricked into 100% financing with an ARM, not fully understanding what an ARM was. There were also all kinds of so called "non profit" down payment assistance programs that would give them their downpayment as a "gift". These "non-profits" would just bill the seller for this "gift" plus a "modest administration fee." The lender didn't care how risky it was because the FHA was guaranteeing the loan! Therefore the brokers would fudge applications so they would get approved. These people were being SET-UP to fail! They had no business getting a loan in the first place!

I am amazed that these downpayment assistance programs are still allowed to operate as they do. If you can't afford a downpayment, how are you going to be able to pay for taxes, upkeep, or unexpected problems that we call "life"? 100% financing was really designed for the wealthy investor. It doesn't make sense for a person that can barely make the payment to be put into a zero equity position. So fast forward to now, and reality sure has caught up with us! All the ARMs have shot up and many people just couldn't afford the home any more. They were also a lot more willing to just walk away, because they didn't put anything into it!

The builders were just as bad! A lot of these fly-by-night types popped up all over Charlotte. They would build cheap housing, and list it WAY OVERPRICED! They would then get a crooked appraiser to justify these inflated prices. They would then trick people the same way I mentoned above. Of course I feel sorry for the people that lost their homes, but I feel even more sorry for the people WHO DIDN'T! They are the ones that are now prisoners in their home because they can't afford to sell it. What they owe on it is anywhere from 15-40% greater than what it is really worth. I am going to share an example of this:

In November of 2002, 4703 Tumbleweed in the Windy Ridge subdivison sold for 109K, brand new. EXACTLY 2 years later, we had a client purchase it for 65k needing about 5k in fix-up. I'm sorry colleagues, but THAT IS RIDICULOUS! As it stands today, homes like this in the neighborhood are comping at about 83-87k. You'll find a few that have recorded above 100, but they all involved 10-20% seller held seconds, or some other "creative" financing like that.

My point is... these builders and lenders NEED TO ANSWER FOR WHAT THEY HAVE DONE! So many lives have been ruined due to their selfish and dishonest actions.

Posted by David Kyle, Charlotte SEO on 01/05/2007 05:15 PM

Comments (22)

charlotte north carolina real estate, charlotte foreclosures, fha, hud, arm

Post is included in group: Charlotte North Carolina Real Estate

22 Comments on Why did foreclosure rates soar?

JAN

2007

Great points David. I'm also dealing with many investors who purchased an abundant amount of homes both new construction and pre-existing for rentals. (Of course they did not purchase these homes via FHA) but via other lending guidelines. The problem now: There is a dramatic influx of homes available for rent. So much so that I received a phone call today from a fellow colleague who can not get a specific home rented. This is a nice home, well over 2300 hsqft. This is not just happening to this one house, but many houses. Why, because of the rental house competition.

In some neighborhoods it has gotten so bad that there are more homes for rent than for sale. And yes, there were some builders (unfortunately) who sold 20+ properties to investors just in 1 subdivision. I know of one neighborhood that has more investors than primary homeowners.

The problem is now some investors are experiencing the shift. When their loyal rent-to-own clients do improve their credit, they go purchase a brand new home---even though the home they were renting was brand new and in tip top shape. So, the investor is stuck with an empty home with no renter to produce revenue. Equally important, the investor may soon recognize this occurring with other properties and therefore decides to sell before it's too late. When I receive the call and research the comps, I discover many times that the price the investor paid for the new home is far less ($10,000 or more on average) than what the market determines it will sell for based upon recent statistics. When this happens the investor is in danger of foreclosure.

David,

As someone who sits on the FHA advisory board here in Dallas, I think you are a little off-base pointing the finger at FHA. That said, I will concur with you that the down-payment assistance is a sham and FHA should disallow it immediately. It is a circumvention of the 3% requirement of an FHA loan. Still, because FHA loans are predominantly used on existing homes, the taxes and escrows are accurate and the buyer qualifying for 3% more loan is probably not the difference in their ability to repay. If they could afford a payment of $1,000 PITI per month, they could afford $1,030 most likely.

Also, look at the decline in market share of FHA loans and tell me how they could be the primary culprit in all this?

You were more on point talking about the fraud, the explosion of 80/20 financing, 80/20 stated income loans, bank statement programs, etc. that came available in the past 5-7 years in sub-prime lending. Furthermore, you have sub-prime underwriters in many cases reporting to the VP of sales so where is the check-and-balance? I have a friend who underwrites for a subprime wholesale mortgage company who said she has overheard other underwriters tell loan officers HOW to commit fraud on the loan to get it approved.

The other explosion in our business....just like the transaction you cite...was in new home construction. The culprit here in my opinion is the setup of a loan with no escrows or escrows based on an unimproved tax value. Here in Texas where our property taxes are so high (no state income tax) that can mean an increase in monthly payments to the homeowner of hundreds of dollars in their second calendar year in the home. Why Fannie Mae/Freddie Mac have not REQUIRED usage of improved tax values for setting up escrows I do not know. I also think congress needs to consider reg z and change the requirements there as well for setting up escrow accounts so that the consumer MUST qualify with the fully improved-upon value.

Good blog and I don't mean to diss your points, but I believe you are pointing at the wrong people overall when singling out FHA.

Ken Stampe

http://blog.homeloandfw.com

Jaclyn:

You sure hit the head on the nail with the rent-to-own comment! We have been doing that, but have recently been forced to move to more traditional real estate due to all the unlicensed rif-raf allowed to do what they please in our caveat emptor state. We feel we did things ethically as possible and gave our clients the best opportunity to buy the home. Many of our clients actually picked the home they wanted, and then we had investor buy it for them! We only took one months rent for an option fee, and signed buyers agency with them so they knew they were getting a fair price. But like you said, when they finally can buy... they decide they want a different house. Over the years I have been very "anti large downpayment" because it's what the unlicensed scammers call their "fee". I have met so many people who have been burned really bad by outfits like that. (That reminds me I need to do a Blog on House Bill 725)But now it seems it is the only way to make sure the buyer-tenant is serious.

We are probably the culprits in some of those neighborhoods you are talking about. There was a reason the builders did this... the homes weren't selling! Craft homes was saved by my BIC and his network of investors! We are the reason they fired their entire sales team, and hired Morris and Raper. We purchased almost 100 homes from them in 2005 alone!!! You might as well rename Sonoma Village to Timothy Cline Village.

It's not our fault though... it was the builders' naivete! How could they believe that new construction could keep going at a rate like that? I know you are aware that the market here is stable and strong, but new construction HAS to slow down!

We have a queue of potential tenants waiting on homes to meet their criteria, can you pm me the details on your collegue's home. In the reverse situation we pay decent referrals. $400 if the rent is over 1100 and 30% if/when they buy. But we know thats a BIG if :)

Ken

I'm not sure how you interpreted my article as pointing the finger at FHA. Thats not what I meant at all! I'm pointing the finger at all the unscrupulous individuals that took advantage of the FHA.

David

Thanks for your honesty. When is this industry going to pull it's head from the sand. Foreclosures are the by-product of real estate and mortgage fraud. Real estate and mortgage fraud does not exist in a vacuum and requires the participation of industry insiders.

I got that impression when you said,

"During that time, HUD made the elgibility requirements a lot easier for a FHA loan, which I believe to be the catalyst of all this. "

What I'm saying is that HUD's relaxing of the appraisal requirement and changing the non-allowable closing costs to be allowable didn't have a measurable effect on foreclosure rates. Down-payment assistance has always been allowed on FHA loans and was slightly restricted this year for the first time.

I agree with you 100% Ed.

Ken, I guess I didn't word that quite properly. What I meant by that was: when HUD did relax things, it attracted the opportunists who sought to take advantage of the situation. All I meant by catalyst was "starting point". I know there were stories from respectable institutions that would decline someone for an FHA, yet they would get approved from some independent broker.

I know if they can afford 1000 they can afford the extra 30 a month. There still can be surprise factors that arrise in home ownership that can cost more than the 1030 a month. Being able to save a downpayment in my opinion means that you are able to save for the unexpected expenses that may arrise. It's clear that the people I'm speaking of couldn't which is why 85% of the homes I've been in were in rough shape.

Very good post David, The Charlotte market sounds just like my market Poinciana Fl. The scammers were out in force in 2004 and 2005 and now we are paying the price. House values are down, ARMS are adjusting upward and foreclosures are at an all time high. Three of my 20 listings are in short sale situations and have a couple more in preforeclosure. This doesn't include all the ones I couldn't help because they were too far gone.

JAN

2007

Great subject matter...

I'd like to comment on at least one of the many other reasons foreclosures are prevelant in today's market.
One that is always overlooked is the percentage of investment properties purchased in the past few years.

The proliferation of investment purchases helped to inflate the value of homes because of the competition it created in the Seller's market. Many investors even purchased properties without any personal inspection particularly in new developments.

While this point may seem trivial to some it certainly impacted the wave of appreciation we experienced and contributed to the resulting demise.

JAN

2007

Good article.Its amazing some of the things you come across in this business

MAR

2007

Why?

1. Loaning to people that could not afford the loan

2. Bankers suggesting that they could afford a home that was more than they could really afford. They became house poor and then some kind of life emergency popped up - whamo

3. Consumer spending/debt - out of control spending - its going to show up in any industry

4. Layoffs

The solution? Education

1. Don't go after a loan if you can't afford one - find out more by reading and learning

2. Same thing here - learn learn learn! 2.5 times your annual income is more than enough home debt to take on.

3. Get a grip on your finances.

4. Plan for emergencies like a layoff. You should have 6 months (at least) income put away in a savings account.

APR

2007

I hope this isn't going to start a flame but it seems that you left out a very important group of people also involved in this. Real Estate Agents, how many agents brought people to these developements because of the huge Realtor Bonuses given. Agents played a big part in this fraud too.

I think it would be greast if REALTOR bonuses were outlawed and the new construction commission was raised to 3%.If a client wants to se enew construction and it is a bonus house I tell them striaght out, hey this house has a 15k bonus on it etc. If they still want to see it or for some reason buy it I split that bonus with them.

Bonuses are bad news in my opinion

I will have to disagree with you on that. In the specific cases I am talking about, Realtors WERE NOT involved.

Realtor Bonuses are usually only used by builders when their traditional marketing efforts have not performed to par. These include various gimmicks like a "free" plasma tv, furniture, whatever. They do this to attract people directly to them and keep Realtors out of the equation. The Northridge village neighborhood never had Realtor bonuses. To compliment their misleading advertising campaigns, the sales center was set up with a circus atmosphere... just like a used car lot. There were wheels to spin, bonuses for "deciding to buy in the next 30 minutes", and a bell for the new buyers to ring when they signed the contract. The sales staff would encourage the potential buyers to applaud when the bell was rung. Very dispicable tactics.

While I agree with you that many Realtor bonuses are added on to the cost of the house, it is not always the case. There is nothing wrong for a seller to offer a Realtor bonus for performance. i.e. A seller telling their listing agent they will receive a 10k bonus for getting the home under contract in 30 days or less should be okay.

Considering my clients all purchase properties for investment purposes, I pass on any earnings over 3% to them.

That's good you do disclose that information to your clients. I realize their are many who don't. Those who don't are running the risk of getting in trouble later. If a Realtor has a track record of having clients buy new homes with large bonuses... it wouldn't be that hard to prove them guilty of steering.

MAY

2007

It seems that the FBI is finally starting to crack down on the unscrupulous business practices of new construction, builder owned, mortgage companies. It is a shame that so many unsuspecting victims had to lose their homes to foreclosure before something was done!

Hi Cheryl

I saw a report on WCNC the other night about Roy Cooper cracking down as well! I literaly jumped out of my seat!

I agree 100% that it is a shame it had to go on for as long as it did.

JUN

2007

David,

I just read your comment on how you "saved" Craft Homes by selling all those homes to investors because they weren't selling. I hope your satisfied, becuase you ruined me.

I was the first person in Sonoma Village and have a beautiful home there. I have spend a lot of money fixing it up and making it the home of my dreams. My career is now taking me to another part of the country and I can't sell the house for what I need to. Not even close. The few houses in the neighborhood that are for sale have been for sale forever and sell for far less than the purchase price. I can't rent it because the rents that these investors are charging are less than my mortgage payment. My options are now to liquidate my 401K to make up the difference or to foreclose.

I will NEVER do this again.

Jason

Hi Jason

I'm sorry you've decided to blame me for your misfortune. Would the situation be any different had we not purchased the homes? How are you equating me being the cause of the problem?

All homes our investors purchased were sold and recorded at the full asking price. Was it our fault that Craft built way too many spec homes? Was it our fault that the entire neighborhood was overpriced? Is it our fault that Craft listed the last phase of construction over 20% less than the first phase 2 years ago? Is it our fault that CP Morgan sells stripped houses to trick people into thinking they are getting "more square feet for less money", which also was a major contributing factor to the depreciation? I don't know what kind of financing you got, but if you took a no money down, 80/20 ARM, it's not our fault that you put yourself in a zero equity situation.

There are obviously other investors involved in that neighborhood. All of our homes were for the purpose of lease purchase. Therefore the monthly rent our investors charged would be at least 20% MORE than the average mortgage payment. If you visit our website, we clearly state that our rents are "high".

I'd let it forclose everytime before messing with your 401k. Considering the situation, it would be pretty easy to get the negative consequences cleared up quickly. The bank won't be able to get any more for it than you could, and they know that.

David

Jason,

What I recommend is that you seek help from a pre-foreclosure specialist/short sale specialist. If you are not currently working with an agent, I would love to speak with you iin regards to your specific situation. As a short sale specialist, I have had much success---as demonstrated via my proven track record. There are not many Realtors in this area who work with short sales---as they are very difficult and time consuming. Additionally, there are not many who can boast and produce many referrals from short sale clients or a proven track record of a 100% approval rating. In any case, I would be happy to discuss your situation in detail--you are certainly not under any obligation. However, if you are currently not working with an agent, seeking help and relief--as time may be of essence give me a call. If you would like, Google my name, Jaclyn Erwin, and you will find several articles/ interviews on my proven success helping clients facing foreclosure here in the Carolinas.

By the way: Well over 45% of all of my team's short sales transactions are from investors who were not properly advised and made some really bad decisions. They now understand, "Just because you have extra money to spend does not qualify you as a Savvy Investor!" If it sounds too good to be true----it properly is!"

JUN

2007

Thanks for the comment Jaclyn!

I wasn't thinking clearly when I said "let it forclose." I was a bit flustered he thought I was the reason he would have to liquidate his 401k.

A pre-foreclosure specialist is definitely what is needed here. Much respect to you.

I hope you can help him out, AND educate him.

JUN

2007

David...good post. Thanks for starting it. I find it interesting that our Charlotte market is touted as one of the few remaining "healthy" real estate markets, yet we have one of the nations worst records in terms of foreclosures. You've taken some heat with this post...way to stand up and speak honeslty, though..

AUG

2007

Greed is not limited to lenders. Many homebuyers were anxious to cash in on the high rates of appreciation before the fall. It's no different than the dot.bomb stock market where consumers ignored the stock's fundamentals counting on someone behind them pushing value to even higher levels of absurdity.

Greg Z.

SEP

2007

Greg Z.

I will agree with your statement in general, but don't see how it relates at all with my original post.

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