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Mortgage Brokers Will Get The Blame for Rising Foreclosures - Is it True?

Three major trade groups want the GAO, the Government Accountability Office to look into the the underlying causes of the marked increase in foreclosures.

The States with the highest foreclosure rates on a per capita basis were Georgia, Nevada and my State, Colorado.

Colorado is No. 3 with a 36% rise to 3,747 properties, or one in every 488 households.

In the past the main reasons sited most often for foreclosure are lose of job, divorce or major illness. The trade groups believe it's the cause of predatory lenders who target and sell high cost loans to sub-prime credit homeowners. The mortgage brokers who sell these loans are an easy target in my estimation. No PAC to speak of to defend its members, a bad reputation, and a much more powerful banking industry eager to point a blaming finger their direction at the drop of hat, make it a scapegoat of choice.

As a mortgage broker myself, I know we have our share of unscrupulous players, but the foreclosure numbers we are discussing are so large that the cause has to be a factor more widespread than a handful of rotten brokers.

I can save the taxpayers a lot of GAO study money right now and tell you the cause of the historically high and climbing higher foreclosure rate.

No it's not bad brokers, rising interest rates, or sub-prime loan loan programs.

Anyone who studies actual foreclosure data (I did in my graduate program)k nows, the real reason (the most highly correlated predictive factor) for foreclosure has nothing to do with jobs, divorce, or anything to do with borrower at all.

The reason for the climbing foreclosure rate is the same as it's always been...it's little to no equity in the home.

Yep...it's just that simple. No equity...high foreclosure rate.

Given that, who's to blame?

Well let's see what causes a "no equity" situation for a borrower.

One cause is new home builders. They sell over priced homes valued by in-house appraisers at unrealistic sales prices to an unwitting public needing 100% financing.

Yep...that could do it.

Being in Colorado I've seen the amount of new home building and the impact a number of entire subdivisions underwater that accounted for our increased foreclosure numbers. My guess would be the same is true of Georgia and Nevada, the other two leading States.

What else could be the culprit?

How about when FNMA and Sub-prime Lenders created a pushed 100% loan programs beginning about 4 years ago.

Yep...that could do it....but only if values dropped simultaneously.

Oh, that's right...values are dropping like a stone in Colorado, Nevada, and Georgia.

Going in with no equity and then watching the home's value drop below the mortgage balance is exactly what causes home owners to walk away..

Home builders, FNMA, and other 100% lenders are too blame for the increasing foreclosure rates. Of this, I have no doubt. However, with that said, if home values were still climbing we'd see a lot less foreclosure.

So what's really to blame is not someone, but some "thing"...devaluation. This is certainly not what consumer advocates want to hear. They are on a witch hunt and the witch they'll find will be mortgage brokers.

Since regulators have "no stomach" to go after home builders, or FNMA or the big banks who created the 100% and sub-prime loan programs for all to sell, I'm sure the mortgage brokers will get the blame...

But now you know the truth.

Rob K. Blake
TheMortgageInsider

Posted by Rob K. Blake, "The Mortgage Insider" on 02/11/2007 06:20 AM

Comments (28)

mortgage brokers, mortgage lenders, foreclosure, home builders, fnma

Post is included in group: Identity Theft and Mortgage Fraud

28 Comments on Mortgage Brokers Will Get The Blame for Rising Foreclosures - Is it True?

FEB

2007

By they way, I don't want this sound like I'm supporting bad brokers who put folks in loans they shouldn't be in...I'm not.

What I am saying is as much of a problem bad broker presents, it's not a big enough factor to be a significantly contributing factor to the enormous foreclosure numbers.

Just to clarify,

Rob K. Blake,
TheMortgageInsider

I'm definitely no financial whizz. So what I say is on an uneducated basis. But I see no correlation between the devaluation of property and the capability of a homeowner to make his payments. He was supposedly capable of making payments prior to the property depreciating. So what's changed?

Your car depreciates through out its loan and the owners still have to make payments. Some default but usually because they run into financial constraints beyond their means to pay. Now those constraints can come from many different directions. But identifying them is what has to occur.

When a "house" becomes an investment vehicle, an ATM, a commodity rather than a "home" it's much easier to place at risk and gamble away.

Historically the proximate cause of mortgage or tax foreclosure has been the resultant financial hardship created by unanticipated expenses, job loss, divorce, and the perpetual increase in cost of living. Unfortunate circumstances will always be present and exact an adverse impact on those of us who live from paycheck to paycheck and who are compelled to borrow beyond our means. I discuss additional contributory factors to the increase in mortgage foreclosure in "A Perfect Storm".

I too don't see when a decreasing market value has an impact on foreclosures. It would seem to be that the lack of income, or maxing out what you are qualified to purchase. We all know that a credit approval up to followed by a pruchase to that extreme puts the buyer at risk. Mortage Brokers and Realtors need to emphasize that up too is max and doesn't necessarily leave room for those incidentals like a busted car or someother event that results in these maxed out people having to barrow from Paul to pay Peter then ultimately going into foreclosure. So a clearer and more definitive explaination of what "You're approved up to" can and will mean in realtion to real life.

The industry relies on the integrity of the appraisal process. Doing the right thing will bring exposure.

The rapid influx of "stated/stated 80/20 loans"- stated income and stated asset loans with lower than the median credit rating ~ 660 and under, with 100% financing is the primary culprit. Folks who really did not qualify for a loan got 100% financing for interest-only adjustable rate loans. So yes, no equity is a problem. But only when combined with folks who have/had only moderate credit, limited income, and no asset reserves. That's my opinion at least. The irony is that FHA, once a primary source for 1st time buyer loans, has seen a steep drop in demand. This is due to it's low maximum loan amount, fully amortized loan requirement, and 2.25% down payment requirement. The same FHA that has been around since 1941. The same FHA that has has stood the test of time.

I believe it is a combination of bad brokers and also bad lenders (account executives)I have seen many times when the credit score is low the account executive tells you go stated and beef us the income..

Then when the loan comes back.. what then?...the truth is the person really could not afford the house.

"I too don't see when a decreasing market value has an impact on foreclosures."

Michael, there is a cumulative effect. When an existing loan becomes unaffordable either by design and anticipated (exploding ARMs), or life's challenges (reduction of income, increased expenses, etc.) losing the anticipated cushion of equity due to a declining or correcting market will, for many, eliminate the possibility for refinance (due to lack of or negative equity) and make selling the home more difficult oftentimes requiring mortgagee short sale approval. If the home becomes unaffordable with no chance at refi and can't easily sell... there will be more defaults and foreclosures.

I think that we are already seeing an adjustment with the large banks. One of the lenders I worked with showed me their economists estimates of areas they have identified as having declining markets. This especially impacts the sub-prime borrowers. The same people who would have qualified a few months ago, cannot get a loan today. I try to have my clients seek information from loan officers/brokers who will take the time to evaluate their situation and whether they should buy now or wait! I don't want to see any of my clients lose their home.

I have always been fascinated by compound interest and bright enough to know if it looks to good to be true.... It ain't TRUE..... somewhere in the fine print is the cause of financial disaster...

$425,000 for only $1,417 a month

So... The blame is shared by the lender and the consumer that does not accept reality and uses the financing.

I think that the appraisal process is a factor too. Not the appraisers, but the process. How are you to value something that you have not fully inspected? I can'ttell you how many times our appraisers are told to just drive by it and do the valuation based on an exterior view. There is more, but this gets me.

Sure, it could be the brokers, and we are likely to take the brunt of the blame. But the rality is, it's not us. Brokers were around 10 years ago when foreclosure rates were lower. The difference today is market and mindset. Rates have risen almost 2% in the last 5 years and that means that any 5yr arm from '02 is coming due. That's note the broker's fault. It's just the reality of the market. The other culprit is "The American Dream". People are buying beyond their means. Heck, forget houses. People are LIVING beyond their means. Americans are drunk with consumerism and status. That's the real reason they can't pay their bills. They baught stuff that they couldn't afford. Last year Americans spent more money than they made. This is the first time that has happened since the Great Depression. And during the Depression it was justified because nobody was making money. Today, unemployment is down, pay is up, and we're still spending more than we make. Is it any wonder people are being foreclosed on?

Great post Rob. Godspeed,

Abe

What ever happened to personnel responsibility. people want things before they earn them. Most are not educated in money matters. Most governments including the Feds. are terrible at managing money. Its the Now generation. I could easily see this coming. People were speculating on rising values and investors wanted big gains. Pigs get slaughtered. It is the way the market works. Its risky

There are many people involved in the loan process. True there are bad brokers, but there are also bad bankers, real estate agents, attorneys and borrowers. The wrong mix of these can lead to disaster down the road.

The first line of defense against these bad apples is our own behavior. Write your deals properly, insure that you ask the right questions and help your clients make the right decisons. WE can't stop all bad things from happening to our clients. We can do our own due diligence to ensure we are making the right recommendations to them.

Part of the Doctrors Hippocratic oath is "First, Do no harm"

As the market changes and the government gets aggressive at detecting and prosecuting fraud it will get better. I think the people who are bad should be punished, not everyone.

If I had to blame someone, I would blame Wall Street. They ultimately purchase all deals and set the "market" for what types of loans they will buy. If Wall Street doesn;t buy 100% No-Income verification loans, they won't get sold by brokers or offered by wholesale lenders. Of course, there should never be fraud, etc., but ultimately those who puchase securitized bundles of loans make the market.

Let me make my point a little clearer...and get your responses.

The whole debate here is that after studying FNMA foreclosure data on thousands of loans during my days at UW MS in Finance Program, my Graduate School mentor, a PhD in Real Estate, discovered through multivariate analysis, that the only predictive factor with a correlation high enough to be considered "causal" was the "negative or no equity" variable.

In the data, over 95% of the time, "no equity or negative equity" was associated with foreclosure. All those other factors were well below the threshold of "causality". Sure on 50% of the loans studied there was a lose of job. Sure on 60% of the loans studied there was a divorce...etc. ( I don't remember the exact percentages but they were a lot lower than most people expected.)

But with those variables the percentages don't rise high enough to be considered "a cause" only "correlated with" or if you will...related to foreclosure.

So given that, a exercise to place blame needs to be focused on the forces, the programs, the situations, that can result in no equity or negative equity.

Many of you are correct in your condemnation of "Wall Street" creating products that require no down payment going in or have negative amortization components.

No one wants so far to condemn home builders for there part in this....what too much power? Don't want to go on record...or just don't agree with the conclusion?

It's easy to blame borrowers who bit off more than the could chew or brokers selling subprime loans, but the numbers show that's not really the case. There are many more folks who didn't lose a job or had any cashflow hardship walking away from their home simply because they don't see the point in paying $1800 a month for a home they could rent for $1000 right across the street? Then they realize that their mortgage is $20K more than the value of the home, and the keys hit the counter.

This is what's happening and what will continue to happen as property values drop.

Who do we blame for that? Is there anyone to blame for declining values?

My guess is instead of putting the blame on the market...mortgage brokers will get hit...the industries favor punching bag...but I wanted you to know the truth....as determined by real numbers and not conjecture.

Keep Commenting ...I love reading them...and I always re-comment to them.

Thanks,

Rob K. Blake
The Mortgage Insider

Great thread! I think that there isn't so much a correlation between a borrowers capability to make payments and the amount of equity, but rather the amount of options one has once they have lost the capability to make payments. Someone going through a divorce/financial hardship with a property worth 400k, and a mortgage of 320k(80%) has a lot more options than if he/she had the same 400k property and owed 400k. In the first case selling at a slightly discounted price of 380k still nets the borrower some money after the transfer tax, commissions, etc. There is no such option with no equity.

I also think someone with more equity and/or a recent sizable chunk of their own money are going to be more likely to deliver pizzas 4 nights a week or whatever it takes to make ends meet than someone with no tangible investment in a property.

It would be interesting to see Steven Levitt of Freakonomics fame take a look at foreclosure rates. I'm no economics expert, but he did alot of isolating of variables in his book that were very interesting.

Danny - What I see happening are buyers that got into 2-5 year fixed loans are now having to deal with the rate going up. What they qualified for in the beginning, may be a lot higher now. They could refi and get a lower payment but with values lower a lot of them have no options.

FEB

2007

Wall Street is certainly complicit. Lack of equity as the primary reason for foreclosure? That's like saying a man died from a heart attack.... after he was shot 5 times. Both events contributed to the death. But, would he have had a heart attack and died were he not shot?

In my experience (national loan default servicing /preforeclosure counseling) the overwhelming majority of folks do not walk away from their homes simply because they have no equity and can find more affordable housing across the street or down the block. But, if the local factory closed, work was scarce and made available in another region (more favorable to employers) and the solution was to sell and move, sure. If there was little or no equity, and suddenly dozens of homes available due to a factory shut down, making a sale seem impossible...I could then see many folks simply walking away. But the proximate cause was lack of work... not lack of equity.

Experiences, access to, and interpretation of statistical information is largely predicated upon our position in the industry.

Brokers not explaining the risks (concerns) of the loans they are setting up for people.

Sure, the consumer has the ultimate accountability...but anyone thinking the 'consumer' understands the risk factors WITHOUT a comprehensive explanation up front...is kidding themselves.

Ok, I have not read all the other comments, so hopefully I am not duplicating someon elses point of view. I myself am a mortgage consultant, but I don't agree with your reasoning behind the Rise in Foreclosures. I think the biggest culprit comes down to mismanagement of finances. IE: no budget, no savings. Another contributing factor could be that mortgage consultants are not asking the tough questions about the buyers other debt, because on paper the buyers qualify for more than they can actually afford.

Recently I could have closed a loan where the owners were very close to going into foreclosure. After doing the numbers, I realized it did not benefit them and was completely honest about my feelings about not wanting to refinance them. I provided them helpful links and talked to both about money management and working together. At this time they are 1 month behind instead of 3 months behind are taking control of their finances.

Isn't a home an investment and like all investments in order to truely gain you have to be willing stick with it for the long haul even during depreciation times? It could be that it's getting easier to walk away, when one is not truely committed to the home?

But what do I know?

David, Angela, Danny: You miss understood the arguement. The goal is find out who or what's to blame for the recent spikes in foreclosures. The job loss arguement doesn't hold water. Employment is up over the last few years, unemployment claims very low, inflation in check...This isn't the 70's with runaway inflation, mortgage rates at 13%, and high unemployment, so that can't possibly be the reason for the recent spike in foreclosures.

You (and many others) believe what seems like a "common sense" explaination for foreclosure...however the numbers don't bear you out. There are many more people who lost their jobs and fight to keep paying the mortgage. Why? Because they are protecting the equity!! That's why "loss of job" is only correlated to foreclosure about 50-60% of the time. Like Michael Byrne said: "deliver pizza 4 or 5 nights a week...to protect their investment". That leaves 40-50% of the foreclosures are "caused" by some other factor(s).

Danny said it's cause is rising interest rates and ARM adjusting? Sure that sounds reasonable...higher payment...just a different version of "can't afford it anymore".

What are a persons options when he cant' afford the payment anymore?
Sell is the first one that comes to mind.
Why aren't these rising payment people or the guy who lost his job, or the guy who can't budget, just selling?

They can't that's why!

Why can't they just sell?

Cuz they ain't got no equity!!! ( Southern drawl added for emphasis)

Foreclosure is caused by "negative or no equity" ...like it or not. There are contributing factors sure...but in the end, no equity is the root cause. It's the gun shot before the heart attack to use an earlier anology.

Thanks for commenting,...

I'm looking for the flaw in the arguement...haven't seen it yet...c'mon people!

You keep commenting, I'll keep re-commenting.

I'll win you all over to my side eventually...

Rob K. Blake,
The Mortgage Insider

Another option is to rent out a room to help with payments?

Do you honestly think that the first thing people want to do is want to sell? Which seems like a logical solution, however, it could all be summed up their emotional attachment to their home, dispair about a number of things like loss of job, no equity, whatever the reason for not being able to get out of their bind, so that leads to inaction, which leads to foreclosure.

But seriously do you think I am missing the point? Well then how about natural disasters such as hurricane Katrina, I'm sure those homes were financed, maybe it spiked up the rise in foreclosures.

Angela:

Thanks for the follow up. In the original post I cited the 2006 high foreclosure states of Georgia, Nevada, and Colorado. So hurricane country didn't at least in 2006 figure in...plus if I'm not mistaken, the Feds put a moratorium on lenders in that area prohibiting foreclosure...for the time being at least.

In response to commentors who want to put the cause of foreclosure on "can no longer afford" reasons ( ie. job loss, higher payments, etc.) I postulated those folks could sell if they could no longer afford the house. That would be viable solution if they had equity and more folks would come to that option before they'd consider taking in renters. (even though I admit it's not a bad alternative, it's not something Americans do.) Other's will try to refinance to lower the payment..unsuccessful though due to lack of equity...all of these alternatives to foreclosure is a moot point since we're analyzing those who don't or can't take foreclosure stopping alternatives.

We are trying to seek the reason(s) those who don't find a way out and actually succumb to foreclosure.

Whether they want to sell or take renters or whatever...if they can't, or won't and didn't stop foreclosure...the question remains, what causes the recent unprecedented spike in foreclosures?

The statistics say it's "negative or no equity"...

Thanks again,
Rob K. Blake

Obviously some of the commentors don't remember the late 80's early 90's when people were walking away from homes because of zero or negative equity.

I purchased my first home in 1984 and watched as my home value swirled down the toilet. Many people during this time were in fixed rate loans as opposed to the very popular ARM of today, but still opted to walk away from their homes. After 11 years in the home I walked away with a $3,000 profit.

As these ARM's come due many people can't afford the adjusted payment and at today's rates they've priced themselves out of the market due to the softening of the market, climbing interest rates and the tightening of loan standards.

Back in the 80's and 90's it was a mindset people had, they couldn't see beyond the negative, paniced and walked away instead of riding out the storm. I watched several of my friends who earned the same and had the same house payment as me up and walk away from their homes. If you were to ask them today they would tell you it was the worst decision they've ever made.

FEB

2007

We are all 'institutionalized' in one form or another, locked away in our separate realities, our parochial loyalties, our fixed way of seeing ourselves and others. (an original plagerism)

FEB

2007

Great Post. I am going to use this for one of my Marketing pieces if that is ok with you

Please comment

FEB

2007

Ed: A great reminder to a time that many of the new home owners don't remember. If a home owner bought his first home in 1992 when rates started dropping he's never seen a down market...might actually believe property values can't drop.

Ben: Feel free to use any of that post...I think if could help a lot of folks figure out they need to be conservative in there buying and borrowing.

Rob

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