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What Causes Foreclosures? You May Not Like The Answer ...

By
Real Estate Technology with Content, coding, marketing, host.

Lack of knowledge, discipline, preparedness or any combination of the three.

This may sting a little but don't shoot the speaker for delivering the data. This is long but I encourage you to read it, share it, pass it along, invite others to read it. After all, we're either working to fix the problems or we are a part of the problems. Silence is only golden when I'm watching TV.

RealtyTrac reported approximately 1,260,000 foreclosures in 2006. Here is a look at 5 select states and their relative percentage of foreclosures to housing units.

 Foreclosure Chart

What this chart does not show is: number of units and foreclosures that we non-owner occupied, ratio of vacant to occupied units, new construction vs. existing, price of new sales compared to foreclosure value, etc.

What I can tell you as a lender is that any loan that goes into default during the first 12 months is a business killer. Get enough of them and you're going down for the count.

What I can also tell you is that the normal suspicious characters are not the only ones that contribute to the number of foreclosures. For example I have a current client who is paying their first mortgage ontime every month but has yet to pay their second mortgage. High credit scores, great assets and solid DTI ratio ... why not paying?

There are some "teachers" who tell investors that lenders can't foreclose on properties because of a defaulted second. Word from the lender: Try me. I will get my money.

So what other reasons might people default on their loans?

LACK OF KNOWLEDGE - a commonality in many owner occupied foreclosures. Sure there are scum-bag loan originators out there but if the borrower had a modicum of knowledge about the most important documents they can ever sign other than a marriage certificate perhaps they wouldn't find themselves in this predicament. I blame the government for enslaving the American people by creating a false air of educational supremacy and for continually projecting the image that Uncle Sam is always around to bail people out when they fail.

REMEDY - require every borrower to obtain a Certificate of Mortgage Understanding before they can sign for a loan document and leave the education up to the industry but have each industry insider offering the Certificate to be approved by an industry group as well as a state licensing commission at LOW COST to the provider.

LACK OF DISCIPLINE - this alone is a 500 page book about how America has lost our touch on discipline. Home discipline and guidance of our children has been stolen from us by the socialist agenda and given to a public school system which in turn fails miserably and puts it back on the parents who are threatened with imprisonment if their form of discipline does not conform to socialist guidelines and I'm not talking about beating children with a baseball bat. American children need to learn the immediate consequence of their actions from birth and they aren't getting it because of socialism in America.

REMEDY - If you bounce a check at the bank it costs roughly $35 to $50 in most banks. This should be lesson enough. If you know you have a $1500 house payment and you can only afford to spend $900 per month on food - why do you take your family out for even 2 meals a week much less 10? (I see this in a couple I really care about but they despise me because I won't lend them anymore money.) Why do you buy a car with a $600 per month care payment when the one you already owned ran fine and just needed a little TLC? Stop spending what you don't have to spend!

FAILURE TO PREPARE - not everyone can prepare for their entire life but everyone must make it a priority to stockpile at least six months of living expenses and I strongly recommend thirty six months worth! And, I admit, as of today I do not have enough reserves to match my plan but it is my goal. Eat out? Nope. It's home cooking for my family. We have long been warned that we do not have enough personal savings/assets in America. Because we have a lack of knowledge and a lack of discipline we fail to prepare.

REMEDY - strong rewards for saving and investing. If the social agenda kills some of the tax advantages for investors it will only punish the weak, undisciplined, uneducated citizen. True investors will continue to invest and those who may have invested or saved small amounts weekly or monthly may no longer be driven to do so. But too many in our elected government have the Robin Hood mentality of steal from us and give to them. Talk about weakening our strengths! But, many of you will keep voting for social agenda because you either don't truly understand economics or because you dislike a candidate for some high-schoolish reason.

TELLING IT LIKE IT IS - some people may never "get it". They can be from good families with great educations and fall flat on their face. It's not the man who falls in the water who drowns, it's the many who doesn't get out of the water who drowns. THERE ARE LIFE BOATS! If you do not get educated from reliable sources with proven track records you are being foolish. If you don't make your payments ontime you can lose your investment or your very home. Take 5 jobs if that's what it takes to pay the bills. I have worked as many as three full time jobs at once - it hurt physically and emotionally but I learned a lesson AND I recovered from the situation I got myself into.

TAKE RESPONSIBILITY - it doesn't matter, in the end, what the loan officer, real estate agent, seller or guru told you it's your duty to fulfill your obligations in life. If you can't do it alone find someone who will at least help point you in the right direction. Do not let yourself be vulnerable to the bottom feeders and cretans. Get educated, gain some knowledge and use that power over the scum.

STOP SPENDING - quit being so anxious to outdo your neighbor. Learn to have joy in abundance of living and not having to strap yourself to your job. Never use your credit card to purchase a disposable item and only use it sparingly for wise investment decisions. Most of my large appliances, yard equipment and entertainment systems have been purchased on credit cards which had no fees and no interest for a minimum of twelve months.

PAY CASH FOR - things that go down in value: televisions, refrigerators, boats, cars, vacations. Twelve months same as cash is only as good as cash if you do not spend the cash on something else instead of making the payments on time.

USE FINANCING TO PURCHASE - things that go up in value: homes, land, buildings. Even then be smart about it. Right now it's my real estate investments keeping me in line with my wealth building plan. Business is down just a bit for a short term and my investments are more than taking up the slack. 

I am currently angry at the dark side of my industry, dissatisfied with my elected government and eager to fix both! If there is ANYTHING I can do to help you, a friend, a client or anyone to have more knowledge, more preparedness and more discipline please PLEASE come my way or send them my way. I have free seminars regularly and I don't pull any punches or teach any trash. I don't do seminars to sell my books, DVD's or charge thousands of dollars to join my program. I am a lender in Georgia and my wife is a Mortgage Broker in Florida and I will help anyone in any state at any time to jump up a notch!

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I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

Comments (35)

Anonymous
Mikey
"An ongoing statistical analysis of DataQuick's foreclosure and property sales database has surprisingly revealed that a financial institution's lending policies are far more important than previously assumed in determining foreclosure severity. Some lending institutions with fine-tuned lending policies have only one-fifth the problem of other lending institutions

Portions of the statistical study, conducted by American Savings Bank researcher Donald G. Wilson, will be presented at next week's Real Estate Research Council meeting at California State Polytechnic University, Pomona. "

Dataquick says bad underwriting causes the most foreclosures. Blame the borrower all you want, but the lenders are giving the money away with their eyes wide open. It is only now the secondary market is "getting it" that the buybacks are happening en masse (thank god!). Now people will underwrite loans with the fear of god in them because the last thing they want is a buyback, the laughable due diligence procedures will be tightened up and fraudulent or unqualified borrowers wont be funded. This will be very bad for the housing market over the short term, but it is healthy for the long term of the housing market.

Feb 14, 2007 09:49 AM
#17
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator
Mikey - you bit. See? That's exactly the attitude that got people into this situation. No responsibility for their own actions. What you quoted is only opinion. Bad lenders need ignorant or greedy borrowers. And, if you actually read the posting, you'll see I put the bad boys in the bad boy corner. Nah, Mikey likes to be the most consistently negative replicant on Active Rain. Why do you hide, Mikey? I mean you do have some valid points that we like to read - sometimes. So, according to Mikey all the lenders should just go away instead of trying to fix the issue. And - before you make a snappy comback to this comment - make sure you read it and understand I KNOW THERE ARE BAD LENDERS but if we had smarter borrowers the bad lenders would never be able to do what they do.
Feb 14, 2007 09:58 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Ken:

I'm going to drive you nuts again. 

YOU SAID: I KNOW THERE ARE BAD LENDERS 

MY FISRT THOUGHT:  lenders can't be "bad".  As long as people continue to overspend and or desire more credit, someone will lend it to them if they think they can make it back.  I'm all for coming down on these "bad" lenders right after we close every casino, racetrack, card room, pool hall, and tavern.

MY SECOND THOUGHT: Have you heard the one about the poor family who won the Powerball for $68 million just to be destitute some 5 years later?  Have you ever thought that perhaps the "foreclosures" are just the renters we insisted be homeowners these past six years?  Maybe they're getting us back for making them do something that was so unnatural for them.

POST THOUGHT ABOUT mikey:  mikey's not a bad guy when you get to know him.  He's pretty well informed and is probably a loan officer.  I wish he would join AR so I could "see" him.  He's negative but he predicted the sub-prime tanking some 3-4 months ago.  Hey mikey!  Say something positive about anything so we know you aren't suicidal.  Anything!

Feb 14, 2007 11:39 AM
Anonymous
Mikey

I didn't say the borrowers shouldn't take responsibility, my statements have always been that nobodys hands are clean in this mess (the infamous "Blame Game" thread). But it would be TRIVIAL for the lenders to clean up their side of the house, it is simply due to greed that they do not do it. The checks and balances on the brokers were non-existent, they are getting better, but still pretty bad. The underwriting standards were just silly, getting better, still pretty bad. The price vs risk spread was nowhere near adequate for the loans given out, getting better, still pretty bad.

Since people SHOULD be responsible for their own actions, and these people(lenders) aren't doing enough due diligence on what they are given and are giving money to people with a history of irresponsible credit use AND letting them (or their mortgage broker!) state their income. Yeah, that doesn't sound like that would go bad at all. It is IRRESPONSIBLE to give money to IRRESPONSIBLE PEOPLE without a lot of documentation of income, due diligence on the house they are buying (appraisers not influenced by brokers or real estate agents, and double checked by AVM), and TIGHTER standards on DTI. There is no way a low FICO borrower DTI should be anywhere near a prime borrowers DTI (I saw some lender last week "tighten" their DTI for under 620 from 55% to 50%, laughable). And if anyone brings up "sophisticated modeling" again that allows lenders to do this, I will just point to HSBC and their team of 150 physicists dedicated to modeling that just modeled them into a $10 billion loss.

It is easier to qualify for a home loan than it is for a credit card. Complain about the borrowers all you want, but it ignores the "golden rule".

The buy backs will solve all this silliness right quick.

p.s. A positive statement for Brian Brady: "I am positive home sales will go down this year", good enough? ;-)

Feb 14, 2007 11:57 AM
#20
Mario Rea
Talmer Bank - Macomb, MI
VA Loans.FHA Loans. New Construction.Conventiona
Ken, good post.  Sometimes you have to be cruel to be kind (many of us that grew up in the '80's are singing that song right now in our heads).  Seriously, this problem is only going to get worse unless people make better decisions, lenders tighten up again and said people realize there are consequences to their actions.  As a lender, I must do what is best for my client, but in order to make a living, I must make my clients happy also.  Unfortunately, many people  are only one paycheck away from bankruptcy, but they still want the most expensive house they can get with an interest-only loan.  I guess everything comes full circle, but it's going to get even worse in the next several months.
Feb 14, 2007 12:19 PM
Kaushik Sirkar
Call Realty, Inc. - Chandler, AZ
Thanks for sharing.  This is a whole lot of well laid out info!!!
Feb 14, 2007 12:34 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

A positive statement for Brian Brady: "I am positive home sales will go down this year", good enough?

Dude, I'll take it any way I can.  You know what, Mikey?  Never join AR!  You're more fun as an enigma.

And if anyone brings up "sophisticated modeling" again that allows lenders to do this, I will just point to HSBC and their team of 150 physicists dedicated to modeling that just modeled them into a $10 billion loss.

My bad, Mikey.  I stipulate that I was wrong. (unless this debacle was in the model with a plan of a government bailout.  if that's true, then they really are insidious)

 

Feb 14, 2007 02:46 PM
Glenda Crowell
John L. Scott, Bend - Bend, OR

Better yet keep you job and pay your mortgage. Case in point borrower shows well and as soon as the house closes quits the job and engages in other activities and then becomes angry when the foreclosure begins.... HELLO....

G

Feb 14, 2007 02:48 PM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

Brian! I agree. Excpet there are people who take advantage of the weak. Or is that Advantage Of The Week?

Mikey! Like I said a month ago - they whined and moaned because they couldn't be treated like people who did manage their credit and the industry capitulated. It's a result of the socio-economic direction this country has been headed since Hoover. People may be created equally but they either perform or fail to perform on many levels. You are half right - which means what?  Are you willing to pick some specific ZIP Codes on your negative positive?

Brian! I just figured it out ... Mikey must be a researcher for CNN! 

Feb 14, 2007 03:11 PM
Anonymous
Mikey

Are you willing to pick some specific ZIP Codes on your negative positive?

Heck national 2007 sales numbers will POSITIVELY be down over 2006. California (where I live) sales will be down, large number of vacant homes, default rate rising, large number of ARM resets, extreme out of whack monthly mortgage payment versus income ratio, large number of borrowers dependent on hybrid/IO/neg am ARMs in order to get into homes, and highly dependent on the subprime market. To say nothing of the negative savings rate and record high debt load. And all this within the context of a good economy, just imagine if all the excess supply of workers related to housing get laid off (which is just starting to happen in significant numbers). Hopefully the economy continues to do well and this will soften the blow of all the craziness.

 

Feb 14, 2007 05:40 PM
#26
Danny Smith
DISCOVER TEXAS HOMES - Round Rock, TX
Every-time I show clients a foreclosed home I can't help but get a feeling of sadness inside of me. Most of them involve family's with small children and you can't help from feeling for them no matter what the extenuating circumstances may have been that caused the foreclosure. I thrive on placing these family's in homes that will make them happy. Homes that their family's can build memories in.
Feb 14, 2007 06:48 PM
Sean Dankers
Realty World Select - Fredericksburg, VA
Ken, thanks for the very informative post.
Feb 14, 2007 11:03 PM
Anonymous
Mikey

Apparently this article was front page of the WSJ, the secondary market is actively looking to put back as many loans as possible onto the orginators. Buy backs will really align the market quickly, it will blow up all the bad originators (who will try desperately to lay the loans back on the brokers as well) and brokers. The secondary market is sending out a message that they will not be the ones holding the bag when the music stops.

Feb 15, 2007 06:15 AM
#29
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

THERE ARE MANY REASONS we never offered some of those high risk loans. And I will enjoy the absence of some of my competition. But I'm not going to say that all my competitors who did take some crazy risks were evil.

EDUCATE THE BORROWERS and the problem will be diminished to almost non-existence. 

Mikey I bet you would just love this website: Implode

Can you go ahead and predict for us what the next wave of upsets will be so we can avoid them? What would be your dictatorial edicts to prevent another haka moa over who's fault it is people were so ignorant they were so easily deceived by the Evil Lenders? The entire MBA and NAMB is interested.

Feb 15, 2007 08:26 AM
Anonymous
Mikey

I don't think it takes much thinking at all to realize it is all going to melt from the bottom up, just how far is the question. I personally think "Alt-A" is next, but we shall see.

I remember last month, listening to the Deutsche Bank Real Estate Outlook conference and listening to the Mortgage Panel. Peter Norden, CEO of Opteum, said, "The Street really the ones that formed the paper that is out there causing problems. Let's face reality there isn't a mortgage originator out there that would produce a 80/20 subprime loan unless they had somewhere to sell it. Wall Street invented the product, bought the product, and is now forcing everyone to buy the product back.... There will be some some tightening of stated income, stated assets from a credit perspective it invites fraud."

All of those loans that are "new" and fancy and have never been stress tested in a down market will be suspect from this point forward, imho.

Feb 15, 2007 09:45 AM
#31
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator
Mikey, probably the best comment I've ever seen from you except I was looking for some prediction that isn't patently obvious. Non-prime will remain. It will become what it was, or needed to be, when it was first introduced which was the industries freedom-of-choice answer to FHA. Big non-prime lenders will continue to portfolio billions of dollars worth of performing level non-prime paper. Reform is required but non-prime is here to stay. Again, as I wrote in the earlier blog, it's the socialist screaming coupled with a huge national increase in home refinance fueled by rampant press and uneducated borrowers that created "bottom of the barrel" lending solutions and Wall Street at them up. Now when the smoke clears we'll get back to 1999 - 2001 type non-prime which made newcomers like Novastar quick giants in the industry. Peter Norden, funny you should bring Peter up, no pun intended, (hello Peter) he is right about the street creating the solutions because without a buyer there are no sellers. We have had that discussion before. I personally would prefer to limit loans to 80% full-doc buyers but that's not reality, Mikey. What is reality is that balance is being restored but to prevent a recurrent oportunity the borrowers must be educated. I will continue to educate and will continue to do so for free. If they leave my offices and go to someone who will do for them something I just explained to be a bad decision that, in MY humble opinion, just shows that they both are probably getting what they deserve.
Feb 15, 2007 01:09 PM
Anonymous
Mikey

Education is no substitution for sound underwriting, blame the borrowers all you want, but you can't give people with proven track records of being bad with money, more money, and then complain they are bad with money. This cycle can only have got this far by all parties being irresponsible, because if any one of them took personal responsibility, the cycle would stop.

Again, as I wrote in the earlier blog, it's the socialist screaming coupled with a huge national increase in home refinance fueled by rampant press and uneducated borrowers that created "bottom of the barrel" lending solutions and Wall Street at them up

Wow, the socialists huh. Funny, it just look like a money grab by Wall Street fixed income markets looking for higher returns in a low interest rate enviroment. It isn't like the GSE's that got us into this mess. (p.s. Blaming (any) political party and/or "the media" is such a mental crutch)

FYI: Opteum just announced $33.9 million loss in '4Q yet subprime is only 4.3% of their originations, I guess Alt-A is already being affected (and apparently Silver Star was Alt-A).

Well it looks like we are going around in circles, its been fun, I shall leave you with the last word.

 

 

Feb 15, 2007 06:17 PM
#33
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator

If we don't educate it can and will repeat - although it will be wolves in different clothing. When people fully understand they have the freedom to walk away, the ability to question and the intelligence to overcome - the PROBLEM can cease.

I blame no political party - I blame US, Mikey - me and you. Spend your time teaching 10,000 future borrowers and you'll save many of them from signing documents of which they have no understanding and the element you and I both desire to leave will do so.

I need no crutch. My experience and the future I intend to provide to educated borrowers is sound.

You reverted. Spin positive, Mikey. Arguing with me about who's fault it is will do the borrowers no good.

Feb 16, 2007 03:17 PM
Caleb Mardini
Bellevue, WA

OK this is one of my greatest industry peeves so I have to chime in again.

If i choose to lend someone money I'm going to have a list of criteria and conditions that I'm going to go over to evaluate whether or not I deem this person credit worthy.  If the criteria that I set up are acceptable to me, and I am able to be competitive with my fellow lenders then I 'm going to lend that "someone" money.

I am calculating and choosing my risk level.  If I do this a thousand times over, depending upon my risk aversion level, a certain percentage are going to default.  There is some amount I work for to maintain some level of risk vs reward that is acceptable for my desired level of return.

I am responsible for who I choose to lend to.  If my defaults far exceed what I had calculated then I can only blame myself.  My guidelines were ineffective or not followed.

 

I've talked about this before on these two posts 

A conversation I just had with an underwriter. By Jeff Belonger

Lori Leave Loan Guidelines to Lenders By Brian Brady 

Banks are pushing for and have won tougher bankruptcy laws.  So in a way this is socialism, for the banks, however, not the borrowers.

Lending is a science.  A lender has the money and the resources to determine what is going to work and what isn't on an aggregate basis.  A loan is a very complicated instrument which the vast majority of borrowers are not going to fully understand.

Is personal responsibility a factor here?  Of course. But what about corporate responsibility? Are the banks not responsible to their investors?  Is there enough accountability there?

If one person defaults we can perhaps look at them.  But if, within your bank, defaults are systemic, then clearly the fault is with you.

Thanks! 

Feb 19, 2007 05:21 AM
Ken Cook
Content, coding, marketing, host. - Marietta, GA
Content Marketer/Creator
UPDATE: We now know for a certainty that RealtyTrac was overstating the number of foreclosures. How badly this damaged the economy we may never know.
Nov 07, 2007 06:00 AM