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Foreclosures -- What are the causes of foreclosures?

By Jeff Belonger

Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

January 26, 2008 03:48 PM

foreclosure sign

So much talk about foreclosures and associating subprime mortgages with the word foreclosure. Don't get me wrong, as 4th quarter figures come out, delinquencies are on the rise, on subprime mortgages. But they are also on the rise on FHA and conventional mortgages also. But let's take a deeper look at some of the reasons for foreclosures.

What would you think a big reason for more foreclosures of lately? What about the fact that home values are dropping all over the country. Think about it. More people a year or more ago, who were heading in the direction of a foreclosure, still had equity in their homes. They could actually sell for a slight profit, take the money to pay bills, and be able to rent comfortably. Some even took the money to buy again, but downsized. This is not the case anymore, since so many homeowners are upside down on their homes now. Meaning that they actually owe more than what the house is worth. Making it more sense for the homeowner to just walk away from the home. And with arms beginning to reset now, they don't even have the equity to refinance.

job loss Reasons for foreclosures : (figures from this summer - 2007)

Loss of job. This reason alone counts for more than 55% of all foreclosures.

Next in line, in no particular order would be divorce and illness/medical.

Those that can't afford to sell their house because they owe more than it's worth.

Payment adjustment, because their rate increased.

Mortgage fraud by lenders or the consumer.

One thing that will be sure for 2009, in my opinion, more foreclosures that will take place will be because there is no equity in the property and because of rates that are about ready to adjust. I have 3 clients just in the last week that have called me because of these concerns.

Solutions....????? There have been several mentioned in the last 3 to 4 months, revolving around how to help those before they go into foreclosure. Most of these programs originated on behalf of the government and President Bush. Getting lenders to participate, hoping that it will curb foreclosures. Will these new programs work? In some cases, yes. But it will be a small number. What the average consumer needs to understand is who to turn to if they noticed that they are getting financially in trouble, no matter what the reason may be. Seek help and advice. Don't wait until the last minute. Here are some tips on how to avoid foreclosures. Foreclosure Tips -- How to avoid foreclosure.....

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Ray Wilburn

Keller Williams Realty - Everett, WA

CPA, MBA

IT is true many foreclosures, are unavoidable, but many are the result of people not being realistic with their investment. Thanks for the post.

Jan 26, 2008 03:53 PM

Nate Secor

Netpro Realty - Newport Beach, CA

55% losing their job? historically this might be true, but I believe neg am loans blowing up is probably about half that are happening right now. They can add a letter of hardship and say their work is slow, or they got fired, but the truth is they probaby never even had the "stated income" job they said they had. The solution for foreclosures is to let the process play through. The president can only screw things up and delay the pain that will have to come full circle eventually. Just like always lowering rates. We will eventuallly have to pay the price in the form of high oil prices, high raw material costs, and a week dollar. We cannot stop the pain, only spread it out, slow it down, pass it on to someone else, or deal with it. I am not to say which one of those is the best, just the available choices as i see it.

Jan 26, 2008 03:55 PM

Renée Donohue~Home Photography

Savvy Home Pix - Allegan, MI

Western Michigan Real Estate Photographer

Great advise Jeff, never wait until the last minute! Let me just tell you, I did a bpo interior for what I thought was a routine short sale yesterday. The woman was frantic when I walked in the home "this is rush". My reply "these are all rush". Her reply "no it's going to a trustee's sale on Monday."

I had to explain to her that the bank orders this with a third party vendor who then contracts with us. The bpo would take about 5-7 days to get back to the bank.

I promised her we would finish it today ( a day earlier than due date) but that she really needed to consult with her list agent. She had NOT ONE BOX PACKED.

Four hours later she is calling me, threatening me and screaming that it hadn't made it to the bank. LUCKILY I was on the other line so she went to voice mail and I have this saved on voice mail. She has been phone stalking me the last day and I have been phone stalking her list agent.

I think people get into denial and hear what they want to hear. Short sales will not save your home, that is why only 1 in 100 are closing right now. Many get foreclosed on in the middle of the process and it's unfortunate for all parties.

I would also love to have the solid statistics for the reasons in the Las Vegas Valley. I am guessing 60-70% are investors who never anticipated a long hold but speculated on short term huge gains. They are chopping it all off before they bleed to death

Jan 26, 2008 03:57 PM

Lanre-"THE REAL ESTATE FARMER" Folayan

Samson Properties - Bowie, MD

I don't make promises.I deliver results.SOLD HOMES

Home owners just find it very hard to walk away from something they spent their blood,sweat and tears for years building. A lot of people who were planning on retiring have been forced to go back into the working force because of foreclosure. Like Renee Burrows said,Short sales will not save your home. Great post.

Jan 26, 2008 04:03 PM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

RAY..... this is a true statement. Being realistic. I had a client that told me that they were approved for a $200,000 mortgage. He was interested in a $400,000 home, making only $47,000 in total income. And I could barely qualify them for a $115,000 house. What killed me here was that the previous lender never told them what their payment would be on the $200,000 home. And I was angry inside, with this person, because they never asked the loan officer either. Sorry for this next statement, but are people that stupid?

NATE..... I did mention that this figure was from in the middle of 2007. And new figures aren't out as of yet. And I did state my opinion that more foreclosures will be the result of people upside on their homes and because of arms adjusting. Believe it or not, neg am loans were at the bottom of the list, even by mid 2007.

In regards to those that did stated loans? I am sure many over-stated their income, or the lender. And I agree, we just need to allow this all to work out in time. Thanks for your input and feedback.

RENEE..... thanks for the compliment. I just don't understand why some people are so rude, when they more in likely created the problem. All you are doing is trying to help. And I agree with your statement, that short sales in many cases, won't save your house. Thanks for the input.

LANRE...... well, you would think that this would be the case, because of blood, sweat, and tears. But I have spoken to about 6 people in the last 1 1/2 months, most of whom said that they would just let their house go into foreclosure. Now, I am talking to one client who I received a call from yesterday. They are doing everything possible to save their house. Good people do finish last...... thanks for the compliment.

Jan 26, 2008 04:18 PM

Randy L. Prothero

eXp Realty - Hollister, MO

Missouri REALTOR, (808) 384-5645

The last item on your list (mortgage fraud) is the one, that may be the cause of more foreclosures than anyone expected. I just wonder who many of them will actually be recognized for the cause.

Jan 26, 2008 05:25 PM

Teri Eckholm

Boardman Realty - White Bear Lake, MN

REALTOR Serving Mpls/St Paul North & East Metro

Jeff--So many houses. So many reasons. So many sad stories. Good information for those going dealing with the process.

Jan 26, 2008 11:08 PM

Fran Gaspari

Patriot Land Transfer, Inc. - Limerick, PA

"The Title Man" - Title Insurance - PA & NJ

Jeff,

Great post! We need to start getting radical with economic policy as a country to turn this trend around! Start with oil & gas prices... Thanks, Fran

Jan 26, 2008 11:51 PM

Faina Sechzer

Henderson-Sotheby's International Realty - Princeton, NJ

Real Estate Expert - Princeton, Montgomery ,Hopewell, NJ

Jeff - terrific post. It is very telling that the job loss reason amounts to 50% of the foreclosures. I wonder if these people were in a sound financial position before loosing their job.

Jan 26, 2008 11:58 PM

Jim McGrath

Roseland, NJ

As a mortgage Servicer...this is a sad tale. I personally know of about 50 more reasons, but Jeff you're on the money. More times than not it's a combination of more than one thing that makes the actual foreclosure happen....Lost the job and had the house drop in value...Payment adjusted and I'm making less money now, wife is having a baby and isn't working anymore...

All sad tales.

Jan 27, 2008 12:08 AM

Paul Moye

Benchmark Realty - Franklin, TN

Broker, GRI, SRES

Good post and good infor for the public to understand. As an REO Broker the number one reson we see right now is the 20%ARM on a 100% loan which is #4 on your list but is #4 on your list.

Item's #1 and #2 banks count on 5-6% of all loans to default due to these issues.

The one they did not see coming the most is #4 as we are seeing trends in markets and increased investigation by the FBI and SEC into calusion with builders, agents, local lenders and appraisers to inflate prices and fees

Jan 27, 2008 01:01 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

RANDY..... this is probably a hard one, because you need to prove fraud in order to know that fraud took place. I am sure this happened on more stated loans. But I am sure that it happened on some full doc loans also. I found a loan officer many years ago with blank W-2's before... scary...

TERI..... and there will be a lot more. I am starting to receive more calls, asking if I would be able to help. And the last 4 issues were all because of loss of job.

FRAN..... thanks for the compliment. Yes, we need to start, and the gov't does need to start with oil and gas and stop using these lame excuses. You really wonder who is padding their pockets at times.

FAINA...... I think most of them were in a sound financial position prior to their loss of job or income reduction. I know some of this from each story that I have heard. And these are the people that are trying to keep their house afloat. I think part of the problem are those that over spend and see so many go into foreclosure and decide, ah, why not... I need to protect myself. I have heard that also, from clients. We will be seeing more in the next 10 months.

JIM..... sure, I could break up some of these reasons and make sub-reasons. And yes, I missed a few, but these in my opinion, are the larger reasons. Not only from my own experiences in dealing with the consumer, but from the researching that I did prior to writing this post. And you are correct in regards to some of these being the combination of some reasons, which I didn't mention.

PAUL...... thanks for the polite comments. You have to remember, some areas might experience different levels of foreclosures also, such as Tennessee might be different, if you see a high number because of the arm resetting. But in my post, I stated most of what is on my list was from numbers in the summer of 2007. These numbers will be changing more when more arms reset. But if you understand my post, the reason why arms will be a bigger player is because the consumer won't have the equity to refinance, making the arm the reason. But the real reason would actually be because of no equity.

In regards to numbers 1 and 2? That banks already have a certain percentage that they know will happen because of certain reasons.... those numbers are growing also.... I have 3 people that I just talked to in the last 2 weeks, and they are heading into foreclosure because of loss of jobs. The fraud info will start to appear more, after they do some more investigating. thanks for your input and feedback.

Jan 27, 2008 02:28 AM

David Hintz

Accurate Appraisals & Consulting of AZ - Maricopa, AZ

AZAppraiser

Jeff - In my area the reasons are pretty much the same as in yours and everywhere else. There is one thing contributing here and in a few other places that is being neglected - Reverse Migration. I updated my blog - Appraiser Comments - with a post about this. http://azappraiser.blogspot.com/

I also agree with you that this year and next foreclosures will increase.

Jan 27, 2008 12:30 PM

Peter Cannon

New Berlin, WI

NMLSR ID 400610

Changes in the Bankruptcy laws contributed as well. Since it became harder to declare Chapter 7 many people paid off debt with their mortgage and as appreciation slowed or stopped it became difficult to sell or refinance.

Jan 28, 2008 03:08 AM

Dave Woodson

Dave Woodson - Chesterton, IN

Not the Average Agent

Good post, Jeff, but as reading some of the comments it is still very clear that many people do not know what the real issue is here and I thank you for helping bring it out.

Feb 23, 2008 01:41 AM

Mike Norvell Sr

Morris Williams Realty - Leesburg, FL

Norvell Consulting Group

Jeff...There is no one answer..No one reason..But there is definitely a large number of similarities when it comes to the ones I see here in Central Fl

Wanna be Investors who bought for cash back and 100% financing...mortgage fraud by all involved, from the fabricated loan docs : that covers the investor and the loan officer, to the appraiser who made the numbers work, to the underwriters who accepted the fuzzy math, to the secondary markets who gobbled up the papers by the billions.
End user home owners who believed what the loan officers told them and just signed blindly, and moved into houses they never could afford...when the resets hit, and the market had declined, they could not do the refinance they thought would bail them out...they have nowhere to go, but get out of the home.
Then we have the job loss, the health issues, or divorce that changed the financial picture of what the family could now afford...Many of these families did all the right moves, bought a home they could afford, got a fixed rate, but life dealt them a low blow...

Those are my top three categories, but, again, Real Estate Is Local.........

Feb 23, 2008 02:39 AM

Juan Boldizsar

Belleville, IL

How about irresponsible lending practices? At one point in the not-too-distant past there were lenders whose guidelines provided for 95% LTV mortgages on a "no-doc" basis to borrowers with 620 credit scores! Personally, I believe that no-doc loans have their place..... but 5% down with a 620? It doesn't take a Wall Street MBA type with a fancy risk modeling algorithm to find out that that loan is going up in smoke.

..... and it's not just the Alt-A folks out there. At one point FNMA's Desktop Underwriter regularly approved loans with debt-to-income ratios of up to 64.99% I'm not an expert on taxes or anything, but assuming a tax bracket of 28% plus housing and other debt of 65% of someone's gross monthly income, you've got 7% left. On $5K a month, that's $350 left over -- not much more than $10 per day.

Anyone care to chime in?

Apr 20, 2008 02:19 PM