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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