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Are Some "Victims" of the Foreclosure Crisis Really Just Opportunists?

Today, I am going to ask those politically incorrect questions that no one else has dared to ask. I'm going to ask because these questions are at the very core of what is wrong with our economy.

Someone has to ask if we ever hope to have a prayer of getting back on track.

Are the REASONS for all of these foreclosures REALLY valid? Or does the foreclosure epidemic have elements of "jumping on the bandwagon" and "taking advantage of the situation"?

Do you think SOME people are just walking away because the media has imprinted the word foreclosure on their brain so many times that they are brainwashed into thinking it must be the "IN" thing to do?

And the worst question of all: Are some people walking away from their houses because not only is "everyone else is doing it", but because they perceive the financial gain far outweighs the social stigma of losing your house?

Remember when it used to be shameful and embarassing to lose your home?

I will give the politicians this: they have all finally had their "duh!" moment and are "halting" foreclosures. Last week Fannie Mae and Freddie Mac announced they would suspend foreclosures for 16,000 households through January, giving people a chance to negotiate their loans and stay in their house.

This of course assumes they would LIKE to stay in their house. I'm not so sure that this is the case. But more than that, it assumes that all of these people were victims of bad loans. Or, they were victims of a bad economy CAUSED by bad loans. They deserve our sympathy and our tax dollars. Right?

When I talked to literally hundreds of people who were attracted to a restructure program being offered by Bank "W", I found myself cringing as these homeowners revealed the reasons they had stopped making payments, and needed assistance.

Yes, some lost jobs. Yes, some had adjustments on their loans they could not afford.

But what about these reasons which have nothing to do with their ability to make the payments?

"My house has lost so much value and I will never be able to sell it. I decided to just give it back to the bank." (Never mind that part of the reason they owe more than the house is worth is due to a refinance that cashed out all of the equity).

"My whole neighborhood is full of foreclosures, so I want to get out of here." (Great, let's just add another house on the street to the demise of all those other people on the street who ARE making their payments)

"Oh, I can afford my payments. I just want to see what the bank will do. My friend just got their loan adjusted by her bank and now owes $100,000 less." (Never stopping to consider who will pay the bank back for forgiving a hundred grand?)

The whole foreclosure "RESCUE" is being botched. Let me explain it this way:

Inside the barn there are a few sick, thin horses. You don't ever consider WHAT might have made them sick, so you can HALT the SPREAD of the disease. In a panic to save your prize racehorses, you make the fatal mistake.

You treat the symptoms and not the cause. Figuring out the cause is so much harder than just "throwing some hay" at the problem.

Soon, the other horses see how much more hay, and how many more horse biscuits the SICK horses get, and they develop similar symptoms of their own.

Thinking all of the horses are way too sick to run, you come to feed them one day and leave the barn doors wide open. In an instant, the horses stampede out of the barn and are gone.

You have gone broke from buying all that hay, and you STILL don't have any horses! What happened?

Maybe you should have paid more attention to the horses that weren't SICK?

Maybe you shouldn't have REWARDED the horses so generously that were sick?

Maybe paying to diagnose the cause and test all the horses for the disease would have been cheaper in the long run?

There's one thing you know for damn sure: It is WAY TOO LATE to close the barn doors AFTER the horses are out.

Written by Janet Guilbault, Mortgage Lending Specialist with RPM Mortgage, and based out of the San Francisco Bay Area

Posted by Janet Guilbault California Mortgage Banker/Broker on 11/22/2008 09:43 AM

Comments (30)

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30 Comments on Are Some "Victims" of the Foreclosure Crisis Really Just Opportunists?

NOV

2008

Bravo! Very well stated.

You should run for public office! : )

Janet- Right on! I don't give a darn about political correctness, it has ruined so much of what is important and what we need to face. I was just on the phone with one of the attorneys who refers short sales to us and she was telling me how 97% of the people who call her are bucking and using the system. People want to stay in their homes for 1 to 2 years here without paying a dime to their mortgage and then get foreclosed on after they milk the system as long as they can. Hmmm, how come I can't live free without paying my mortgage? What about all of us who pay our loans each and every month! Who goes to bat for us! I can not tell you how many people are trying to remodify who were never even qualified to buy their homes in the first place! Yet, they are driving fancy new cars, used their homes as ATM machines and now cry foul!

I think you have to know the real reason why we are having a problem and if you try to say its because of foreclosures then you are blaming the wrong thing. I think thats part of the problem as well. Its too easy to blame the victim when the aggressor is at fault. From the start it was blamed on foreclosures because it was an easy scapegoat and took pressure off the real source at the top of it all.

Those who decide to play the game, yet can afford their payments are only hurting their credit. The Lender only works with those who can prove a hardship. Many will lose their homes or their credit thinking they can play hardball.

Good blog...just wondering...do you have any ideas for a solution...now that the horses are out of the barn, how do we get them back in?

Gregory: Hurting their credit does not appear to be a strong enough reason for people to keep making payments. I always wonder if people even realize that this is a huge downside to letting a house go.

Proving hardship was not required in every restructure program. The whole thing is being handled very loosly. What if you prove you can't make your payments but you have a new car in the garage and a new boat? What criteria do we use?

Eau: I agree that foreclosures are a symptom. But they are definately a real cause of declining values. And once values stabalize, I think we are headed up instead of down, and that will change the mentality of the masses.

What do you think is the real reason and who is the agressor?

N and K: You and I have a similar perspective because we are both in states where foreclosures are out of control. I often feel our politicians are so disconnected.

No one talks about this aspect of the bailout. But this is a fact: there are people who do not deserve any kind of bailout who now have their hands out.

They have convinced themselves, with the help of the media, that they deserve to be saved from their own bad decisions.

It is so disturbing to me.

Mark: This is not meant to be political, although I suppose it is. I just think talking to so many people who are actually looking to be saved has given me an in the trenches perspective that people should know about.

I guess what I mean is that the opportunists were the ones in the banking industry who have effectively bankrupted our country after it was already bankrupted by the administration. They have done criminal damage and are not even the focus of any of this. While we instead look at people who just wanted somewhere to live as if they did something wrong. Sure people might take advantage but look at who took advantage first and how much more damaging that was.

Love the horse analogy, also see some lemming in the situation as well. Real early on in this tragedy, a 60 minuets episode had a couple who stopped making payments simply because their home was depreciating. Turned my stomach! 2 words for ya - PROMISSORY NOTE. Seems the day and age where your word was your bond is no longer PC. I fear we may have painted our selves in a corner......

I'm with Scott. I wonder how many new loans will require promissory notes to give lender's recourse.

Money is a powerful motivator...from Main Street to Wall Street.

Scott: It doesn't take a genius to figure out that lenders will not get themselves in this fix again. All loans could end up with a charge for insurance that would protect the lenders from foreclosures. There could be stiffer legal ramifications for walking away from a house.

There could be opt out clauses. I can think of more, but suffice it to say, things will be very different going forward. You think guidelines are tight now? I would say you ain't seen nothin yet.

Melina: Not only is money a powerful motivator, when it comes from taxpayers, it is always considered to be "free" money. Everyone has their hand out, even if the need isn't there. It is why so many people had a negative reaction to the bail out, IMHO

Janet, I cannot see where the reform is truly helping people. Many needing to refinance, as you posted, are still frightened to consider financing. In my opinion too many now want others to wipe the house away their own greed. It will be interesting to see if or when conventional financing, at higher loan-to-values, returns and with what "tag on" as the extra to get it.

Eric: Yeah, well, I usually don't like the word greed because a certain level of greed is just part of the natural order of things, Eric. I think the key here is that things are not appreciated that came too easily and without a struggle. People who lose their houses NOW are going to be shocked at how hard it is in the future to own real estate.

Maybe they don't care, or maybe they are just clueless.

PS think mushrooms and not bacon. LOL I am still a Southerner at heart,

I think people are clueless. I think because of this huge bailout, we have given many in the public a sense that the government will just step in again. Unfortunately, some people have a strong Me vs. Gov't mentality and forget that Jane Smith or Jack Smith have to work more hours now so that they have the privilege of walking away from their responsibilities.

Obviously as an agent I want to see people buying and selling homes, but I am okay with people that buy and bail or work the system to have a hard time purchasing in the future. I'll take their rental money as their landlord so they can start paying me back.

Hi Janet,

Great post.

I especially like this: "You treat the symptoms and not the cause."

I have been saying for the past year, most to myself, that these loan modification programs are not the solution.

The problem is that property values are dropping. In the absence of this decline, we don't see this many foreclosures.

Property values are dropping because there are too many homes for sale and not enough demand.

What Congress needs to do it pass a new fiscal policy that would stimulate new demand for real estate via a tax incentive.

Janet I thought you already were a Southerner. As far as the greed goes that is how I see it. Too, the next home for many will require more hoops to jump through.

NOV

2008

Human nature strikes again. This of course is a learned response that may work for these people as it has in the past. Lets get this over quickly and let the chips fall where they may. Of course living in the backwoods of America nothing will suprise me.

Have a happy thanks giving!

NOV

2008

The "cause" was easy credit provided by lenders that created one of the biggest asset bubbles in history. Easy credit was accomplished by two factors the relatively new idea of wide-spread use of mortgage-backed securities and the credit default swap market (and the lack of transparency in these two markets). Both of these vehicles moved risk to downstream parties.

In my opinion many of the new programs are designed to maintain artificially high housing prices to our detriment. Housing is massively overvalued and prices need to come back to historical norms compared to wages. The sooner the better for the economy and real estate professionals (because more people will be able to actually afford their houses).

And I disagree with Janet regarding increased penalties for walking away from a house. Instead, lets add "stiffer legal ramifications" to those that approved programs that caused this problem in the first place. I think lenders will put themselves right back in this position unless we outlaw the whole CDS market.

How about this for an idea? Let's lend to borrowers who have a good credit history and can afford a sizable down payment. No exotic loan products so that it forces the borrower to pay a "real" monthly payment.

To the comment by the unidentified reader: I agree with what you have written in the first paragraph.

I would love to know why you feel the new programs are designed to hold prices up. Not disagreeing, just had not thought about this one and would like your point of view,

Affordability is shrinking because of bank guidelines and increasing because of lower prices. The candle burns at both ends and will continue to do so.

We are already pretty much back to basics with loans. Except I continue to have people beg for interest only loans.

New Orleans is hardly the backwoods of Americia. Please, I was raised to be a Southern Lady and not a hillbilly. Happy Thanksgiving, Eric.

In a free market there are periodic corrections. We have already seen some of this market correction in housing. I am convinced, however, that we are due for a larger drop.

The question is when.

The bulk of Alt-A's (3 and 5 IOs) are due to recast in the next two years. Without these modification programs these houses would be on the market driving the overall price of housing lower. Rather than face this upcoming decline, however, we are starting to see more "modification" programs that keep payments artificially low and prices artificially high. This is often accomplished by extending the IO period or even giving an incredibly low fixed rate. But rarely are principal balance reductions part of the offer (unless you have some legal basis to challenge the validity of the loan). Right now most lenders add amounts as a baloon payment due when the property is sold.

So, rather than having more housing on the market in the next two years, the house stays with someone who cannot hope to afford a real payment at its still overvalued price. This keeps housing artificially high into the next decade. Even though you can find great deals in some areas now, the overall effect is to keep prices higher than they otherwise would be.

Think of it this way. Many people would be able to rebuild their credit in the next four to five years if they start now but instead they will hold onto a bad asset. Unless we have widespread principal balance reductions we prolonging the inevitable because they will have to sell at some point at 2005-2007 prices which we probably won't see again until the middle of next decade if even that soon.

Sorry, that could have been more articulate, but I am in a hurry. I'll check back later.

RE. Esq: I do not agree with loan modifications that reduce the amount the person owes. That also has very bad long term consequences in my opinion.

Many of those people with adjustables cannot sell. They are underwater. Their houses will not go back on the market. They will walk away, or find a way to make the loans work.Banks are should try to make the loans work without forgiving any debt.

If banks forgive debt, they lose money. If they lose money, they will make getting loans much harder, or go out of business. If this happens, the market tanks and very few can buy a house for a DIFFERENT reason than the house being too expensive.

You are thinking they lose money if people walk away. Well, yes they do. But not everyone will walk away. Once you start handing out money, everyone expects a piece of the pie.

NOV

2008

I agree with you Janet. Principal reductions are always a bad idea. It strikes me as odd that after all of the impact this crisis is causing, and all of the experts that have analyzed the options, that long-term fixed interest rate reductions is not something that the government is embracing. I understand that it opens the door to legal challenges, but if the government simply worked side by side with private lending institution to reduce the interest rates on current mortgage notes, default and foreclosure would not be what a borrower would choose to do. As long as principal is sacrificed, people will take the handout, and the lender, the tax payer, and the real estate and mortgage industry will continue to suffer.

Janet: There may be some who try to "take advantage" and walk away, but the vast majority would rather stay in their homes. The problems here are not things that the borrowers could control: they did not overspend on credit cards for example.

It seems to me that many wall street banks and other lenders were directly involved in getting borrowers to accept their loans. These loans generated fees and commissions for themselves and for a number of other service providers. Everyone, including borrowers and lenders believed that property values would continue to increase.

Risks were being taken which now look foolish. But at the time the perceived greater risk was that failure to buy now might mean never being able to buy later as prices continued to rise.

Few saw the housing bubble collapse coming, but those who did were loudly pooh-poohed. And since the government's announced goal was to make it possible for many more folks to become homeowners, lending standards needed to be "adjusted".

Loan Originators and appraisers provided whatever evidence was needed to qualify borrowers for the loan products developed at the insistance of the government. Borrowers of course, took full advantage of the opportunity to borrow money to avoid getting left behind in the sizzling real estate markets. The point is, that the lenders were in full partnership with the borrowers in generating these loans. So now that the results are not what was expected and payments are not being made, the lenders expect to hold buyer/borrowers alone responsible for their problems. The unfortunate buyers are the only ones that actually have their own money at risk; everyone up the line was using someone else's money.

Is there anyone out there who agrees with me that maybe the lenders need to accept some responsibility for helping generate the situation and to therefore be willing to help solve the problems? (I'm not limiting this to homeowners -- investors also got caught up in this) This help might be in the form of the recognition that where property values have declined there might be some reasonable adjustments to the size of the loans. And this help should not be limited to hardship cases, in my opinion.

DEC

Well said. You go girl!

DEC

What's wrong with being an opportunist? I didn't create it. It's there for everyone. Now that the govt is giving out money, is it wrong for regular people who make payments to get some? I have an investment property and equity is wiped out due to falling prices. I cried foul when the govt approved the bailout. I cried foul when AmEx changed their status so that they can get some. Then I realized that the bailout is happening, and I'm getting left behind. Why is Wall Street getting help and I'm not? Lehman collapsed and I'm glad the govt didn't help. I've wrestled with the moral obligation and I know it's wrong to stop making payments. But if that is what it takes to get some bailout money...

DEC

DW posted: I've wrestled with the moral obligation and I know it's wrong to stop making payments. But if that is what it takes to get some bailout money...

DW: There are a lot of us wrestling with this. Where does self interest and good business thinking begin and your concept of right and wrong end? When does your concept of the obligation to your family trump your understanding of your obligation to others. I think business schools and ethics students are going to be studying this for a long time.

I agree with Thomas: what we have here is somewhat of an ethical dilimma. We need to interact with each other to figure this out.

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