Why so many foreclosures?

By
Real Estate Agent with Ozarks' Independent Realty

     As an REO broker, dealing mainly with foreclosures, I read all the information I can find on foreclosures. The statistics vary tremendously from one source of information to the next, as I've read that 2006 has shown an increase in residential foreclosures of anywhere from 23% to 46% over 2005. Either figure is staggering. But why is the foreclosure rate rising so dramatically?  Now, please keep in mind that I am NOT an economist, nor is this intended to be an indictment of any certain group of people. Indeed, no one group could be responsible. Rather, a lot of different factors and different people bear some responsibility for so many people losing their homes...

     First, easy credit. Just as so many Americans are in debt up to their eyeballs from dozens of credit cards that they really don't have the means to pay, so are many owing on homes that they really couldn't afford to buy in the first place. Sub-prime lenders offer mortgages to people with a poor history of bill-paying, unstable income, and no down payment, often financing more than the home is worth. These borrowers start as homeowners with no equity, and often no real sense of responsibility as homeowners. After all, they don't have anything invested. When times get tough, they lack the knowledge of how to budget and prioritize, and the mortgage is often the last payment made, instead of the first. They dig themselves into a hole that they can't climb out of.                

     Then there are appraisers who allow themselves to be pressured into "bringing in the numbers," or valuing the house at whatever the lender tells them they need. Not all appraisers do this, of course, but those that do should bear some responsibility when an over-valued home gets foreclosed on. Often the borrowers end up with a deficiency judgment for the difference in what they borrowed compared to what the bank received when it sold as an REO. I have personally sold homes under $20,000 that the bank had lent over $60,000 on because an appraiser was told by the mortgage broker that was needed for the loan to go through.

     So what about the mortgage brokers/bankers? Of course, if they are coercing appraisers to hit the numbers on a home that isn't worth the loan amount, they are a part of the problem. Again, not all lenders engage in this practice. I think many who do really don't stop and think about the potential for problems down the road. They probably feel good about helping someone buy a home and rest well at night. When the borrwers get into financial difficulties and talk to the lender, the solution presented is often "Refinance, take cash out to get caught up on your bills." ARMs at low initial rates are often presented as the best loan, or even as "fixed-rate for the first 3 years." And it's back to the borrower who hears "fixed-rate" and doesn't understand what happens after that, until they get the notice that their payments are now going up, and they can no longer afford them... 

     In short, we all need to take more responsibility. Lenders, don't make bad loans or push appraisers to bring in the numbers. Appraisers, don't be coerced into inflating values. And mostly, borrowers, buying a home isn't like getting a $200 credit card at a clothes store; it is a serious purchase that can either be a great investment or drag you down, financially, for years. Take a home-buyers course, if available in your area, make and stick to a budget, save up a down payment. Be sure you're ready to buy a home before you talk to lenders. That way, you don't become part of the statistics on foreclosures.

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Ambassador
914,620
Kristal Kraft
The Berkshire Group Realtors - Denver, CO
Selling Metro Denver Real Estate - 303-589-2022

People need to learn how to spell responsibility. 

Welcome to AR, I see this is your first post. Congratulations!

kk

Jan 22, 2007 10:12 PM #1
Ambassador
1,649,238
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection
I also want to welcome you.  This was a great post;  too many people try to satisfy their wants not their need that is within their means.
Jan 22, 2007 10:20 PM #2
Rainer
20,988
Amber Bourland
Ozarks' Independent Realty - West Plains, MO

It's sad to see so many people losing their homes. It's even sadder to be working with buyers, give them all the advice you can about not buying "too much house" and keeping the payments affordable, only to have them over-buy anyway....

I have only been in real estate 4 years, 2 years as an REO broker, but I have seen buyers who stopped working with me (maybe didn't like what I was telling them?) overspend on a house, and subsequently lose it. I believe part of our jobs is to help educate the public, but how do you educate someone who doesn't even realize that they don't know it all?

Jan 24, 2007 11:36 AM #3
Rainer
11,078
Chad Blessinger
FC Tucker Kerstiens Realty - Jasper, IN

Amber,

In response to your last post:  I feel it is my job to give my clients all the information they desire as well as any information I can think of or find to give them the tools to make a decision that works for them.  I inform them of the range of home it appears they can afford. I ask them to consider their lifestyle and their comfort level with a given payment.  They can then make a decision.  I don't feel I can convince people to make one move over another.

Jan 30, 2007 06:06 AM #4
Rainer
20,988
Amber Bourland
Ozarks' Independent Realty - West Plains, MO

Chad,I wish all loan officers/mortgage brokers were as ethical, then. I have personally been misled in my own transaction before I started selling real estate, and have seen paperwork from lenders on a number of deals, where they only gave partial information to the buyers. Again, it is, by no means ALL lenders engaging in the dishonest, unethical and sometimes illegal practices. But for each one who does, how many borrowers will find themselves in a precarious financial position? How many homes will be foreclosed in, in part, because a lender told the borrowers which loan was best and the borrowers trusted them, as the professionals? In my opinion, if even ONE family loses their home because their LO or mortgage broker lied or misled them, it is too many.

Many borrowers don't ask enough questions or take time to learn more about the process. Couple that with a lender who wants to make a commission, no matter what (Realtors, appraisers, too) and it can be disastruous for the buyers.

Jan 31, 2007 01:29 PM #5
Rainmaker
315,431
Robert Smith
Preview Properties, PC - http://www.RealEstateMich.com - Brighton, MI
SRES, Search for Homes Brighton-Howell-SE Michigan

There may be some mortgage fraud, but consumers need to take responsibility, too.  It's amazing to see how many of the foreclosures in my area are homes purchased within the last 1-2 years with 100% loans.  Usually young folks who probably don't have financial discipline, get over-extended or one spouse loses a job and wham - disaster.  It's very easy to walk away from a place when you have no equity (or sense of ownership). 

As much as we like to promote home ownsership, there are truly people out there that are better off renting for a while.

Feb 17, 2007 01:16 AM #6
Rainer
6,279
Phyllis Mathouser
Re/Max By The Bay - Exeter, NH
GRI, CBR

I agree with you Robert 100%.  I am dealing with several foreclosures and though one was bought within the last two years, the others re-financed and took all the cash out without putting any back into the house.  These houses are disasters and the banks are not going to get their money back.  I look at that as fraud but I guess some people say the bank got what it deserved??  I have one where the person owned two parcels, one with the house and he bought a separate adjacent lot under a different deed.  He refinanced the lot and took out a huge mortgage on the land which is landlocked and the BPO appraiser based the figure on the house with the entire parcel!  Now the bank owns the land but has no access to it and is trying to get possession of the house.  It is a mess!

 

Feb 17, 2007 04:57 AM #7
Rainmaker
315,431
Robert Smith
Preview Properties, PC - http://www.RealEstateMich.com - Brighton, MI
SRES, Search for Homes Brighton-Howell-SE Michigan

There are always angles for people that look for them, Phyllis.  I'm amazed when I hear people tell me that they can live rent free for 12 months (in Michigan the Sheriff's sale is around 6 months after you've missed your first payment and there is a 6 month right of redemption period that follows).  They've had friends or relatives that tell them about getting keys for cash to move out at the end of that time, too.  Of course, that's more the exception than the rule, but it does happen.

Feb 17, 2007 06:08 AM #8
Rainer
20,988
Amber Bourland
Ozarks' Independent Realty - West Plains, MO

Robert,

I won't ever disagree that the buyers need to take responsibility. I walk into REO all the time to negotiate Cash-for-Keys, and see the big screen TV, new computer, high-end stereo systems, and often so much clothing on the floors, you cannot walk. Apparently the stuff becomes more important then a place to put it. In my original post, it was the borrowers that I discussed first as, ultimately, they are the ones who have the most to lose and have to bear the greatest responsibility. Many buyers don't educate themselves about the process, or about which loans are the best. most have no clue what an underwriter is, how appraisals are done (I've had some call when they get their appraisal report and gripe that "All the guy did was compare my house to other ones that sold on the block"), or what kind of lender fees are appropriate and when they are exhorbitant.  Buyers SHOULD do some research, become educated, understand the process BEFORE they  look at loans or houses. BUT, we in the real estate and lending professions know that most don't. We know the average buyer doesn't have a clue. I have heard one agent telling another that she loves hearing buyers are first-timers, because she can get them approved for higher loans and sell them a more expensive house. That was an agent looking out for her commission, NOT the buyers... An unethical Raltor or mortgage broker uses that knowledge to make themselves a commission check, damn the consequences to the buyers...

So while the buyers are ultimately resonsible for deciding whether they can afford and manage to buy a house, those of us that are trusted by the public to tell them the truth and help them get the best deal or the best loan need to take that responsibility seriously. I was in no way condemning ALL mortgage brokers or ALL appraisers or ALL Realtors- only those who take advantage of a buyer's lack of knowledge and trust to make themselves some money.

We can attempt to abdicate our own responsibility by saying it's always the buyers fault, but that's simply not true. They come to us the same way we go to a doctor when we are sick or take our cars to a mechanic when they have problems; we aren't experts in those fields, so we have to rely on someone who is. Buyers need us and trust us. We need to live up to that trust and earn it.

Feb 18, 2007 12:15 AM #9
Anonymous
Chelsea Elizabethhhhhhh

 WOW

I think that it is crazy and sad that so many people are losing their homes. But it is sometimes there fault i mean sometimes people don't do what they need to do to make sure that things like this can happen to them. I agree with some of these people who say that its sad. I mean i am a teenager and i am already planning so this doesnt happen to me.

Mar 17, 2008 05:22 AM #10
Rainer
20,988
Amber Bourland
Ozarks' Independent Realty - West Plains, MO
Chelsea, It is very sad how many people are losing their homes. It is also getting pretty scary for the economy in general (the high foreclosure rate is just one indicator of the path we are heading down).... I am glad that you are educating yourself and trying to plan ahead. Doing those things does not guarantee that you will have a great financial future, but it sure helps hedge things in your favor!  Just keep learning. There is so much knowledge available, one would think more people would have more understanding of these things. Sadly, many don't.  I give you credit for taking the responsibility and initiative that you are. I wish you a happy, successful future!
Mar 17, 2008 11:13 AM #11
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