Why Are There So Many Foreclosures in My Neighborhood? - 7 Simple Reasons, No Good Solutions
As someone who is involved in the Banking industry, and someone who has seen and made loans that have not always performed as agreed, people have asked for my opinion on what ales the nationwide real estate market and whether it has hit rock bottom. The latter question is easy to tackle and that is no, absolutely not! Not trying to be an alarmist but a realist. Things will get worse, and in some states much worse, before they get better. I live in Michigan so I will factor my reasons for the significant rise in foreclosures and delinquencies to local factors which will be applicable to many states. For a while, Michigan led the nation in foreclosure rates. We have since been passed by Florida, California, and Arizona for the dubious award of having the most foreclosures. So what has caused it, here are a few reasons:
1) Unrealistic loan products – Because borrowers historically never let their homes go into foreclosure, Bank’s significantly relented on the underwriting standards with larger institutions offering loan products up to 120% of the home value in a loan, stated income products, requiring interest only payments, ARMS with escalating rates, etc. If you had a pulse, you got a mortgage. I personally have good credit and could have qualified for any mortgage product I wanted two years ago by stating my income on an application at whatever I needed for approval. Why was there ever a product which did not require me to support my income with pay stubs or bank statements? Why was there ever a product made where you didn’t have to put some money into the deal. When I bought a house I had to have 20% in. Why were the Bank’s and Mortgage companies taking on all of the risk? The idea of a loan is to be a partner but the homebuyers had no skin in the game. They had no equity so it did not hurt to walk away. Not everyone deserves a home, that is why they have apartments.
2) Overnight Mortgage Companies – Because the profits were so huge for years, mortgage companies were springing up over night and mortgage hacks were born. People that did not understand mortgages were now underwriting them, bundling them off, and selling them for nice profits to Fannie Mae and Freddie Mac. These companies have since folded up tent and have probably moved on to the collection / foreclosure business.
3) Commissioned Lenders / Underwriters – While the theory of a commissioned lender makes perfect sense, you only get paid for mortgages that get funded, that causes desperate or greedy people to do untoward activities. This causes a “Used Car Salesman” mentality of selling the mortgage at all cost. Never mind what is best for the borrower/purchaser or for the lending institution, sell the mortgage, make your cut, and move on. Many institutions paid bogies to underwriters based upon loans closed too. This is problematic as it takes the checks and balances out of the process and could easily allow information to be hidden or altered.
4) Fraud – This is fraud at all levels through the process.
a) Application fraud such as falsifying the information on the application (overstating income or assets), or making up fake tax returns (which is simple to do now days with all of these tax programs).
b) Underwriting Fraud – explained in #3 above. Commissioned lenders / underwriters cutting corners to get deals done and hence earn a commission.
c) Appraisal Fraud – appraisers stretching values to make sure that the home values come in where it needs to in order to make a deal happen. Why would they do this? Because if the values are consistently too low, a lending institution would not use this appraisal firm anymore but rather would go up the street to an appraiser who would give the values needed.
d) Credit Fraud – There are firms that you can find on the internet or in the phonebook who are established to fix or scrub credit (for a cost). Thus a Borrower who had bad credit yesterday could have good credit today and hence qualify for a loan that they otherwise might not.
5) Loss of Jobs / Downsizing – This is a huge culprit in Michigan who’s economy is staked to the once big three automotive firms. People who are use to making six figure incomes and who based their home buying on said income are in peril with a reduction of hours or losses of jobs altogether.
6) Increase cost of everything – Gas, groceries, clothing. Everything has gone up significantly in cost without a commiserate increase in earnings. Accordingly, people’s disposable cash flow is weakened and getting weaker.
7) Loss of Negative Stigmatism Associated with Bankruptcy / Foreclosure – There once was a time when having poor credit, filing bankruptcy, or losing your home to foreclosure was almost like walking around with a scarlet “A” on your chest. It use to be very hard to get credit again after these negative events. Nowadays that is clearly not the case.
Certainly there are many other factors that have led to the demise of the home mortgage industry – this is just a few that I usually point to. I am also asked if there is a good avenue to find out about foreclosed houses in your market to find some great deals for purchase. The best options are to call your local banks and mortgage companies and ask for the ORE (Other Real Estate) Department or I have used the attached site which is a wonderful reference of properties for sale in the market (https://paydotcom.com/r/12161/dvowler/19170267/).
The only way for the real estate market to head back in the right direction is for houses to start selling and while these will be at a discounted price, at least assets will be moving. This will eventually cause there to be less houses for sale on the market and as that happens eventually the house values will start to inch back up in value (supply and demand). Not going to happen overnight unfortunately.
1) Unrealistic loan products – Because borrowers historically never let their homes go into foreclosure, Bank’s significantly relented on the underwriting standards with larger institutions offering loan products up to 120% of the home value in a loan, stated income products, requiring interest only payments, ARMS with escalating rates, etc. If you had a pulse, you got a mortgage. I personally have good credit and could have qualified for any mortgage product I wanted two years ago by stating my income on an application at whatever I needed for approval. Why was there ever a product which did not require me to support my income with pay stubs or bank statements? Why was there ever a product made where you didn’t have to put some money into the deal. When I bought a house I had to have 20% in. Why were the Bank’s and Mortgage companies taking on all of the risk? The idea of a loan is to be a partner but the homebuyers had no skin in the game. They had no equity so it did not hurt to walk away. Not everyone deserves a home, that is why they have apartments.
2) Overnight Mortgage Companies – Because the profits were so huge for years, mortgage companies were springing up over night and mortgage hacks were born. People that did not understand mortgages were now underwriting them, bundling them off, and selling them for nice profits to Fannie Mae and Freddie Mac. These companies have since folded up tent and have probably moved on to the collection / foreclosure business.
3) Commissioned Lenders / Underwriters – While the theory of a commissioned lender makes perfect sense, you only get paid for mortgages that get funded, that causes desperate or greedy people to do untoward activities. This causes a “Used Car Salesman” mentality of selling the mortgage at all cost. Never mind what is best for the borrower/purchaser or for the lending institution, sell the mortgage, make your cut, and move on. Many institutions paid bogies to underwriters based upon loans closed too. This is problematic as it takes the checks and balances out of the process and could easily allow information to be hidden or altered.
4) Fraud – This is fraud at all levels through the process.
a) Application fraud such as falsifying the information on the application (overstating income or assets), or making up fake tax returns (which is simple to do now days with all of these tax programs).
b) Underwriting Fraud – explained in #3 above. Commissioned lenders / underwriters cutting corners to get deals done and hence earn a commission.
c) Appraisal Fraud – appraisers stretching values to make sure that the home values come in where it needs to in order to make a deal happen. Why would they do this? Because if the values are consistently too low, a lending institution would not use this appraisal firm anymore but rather would go up the street to an appraiser who would give the values needed.
d) Credit Fraud – There are firms that you can find on the internet or in the phonebook who are established to fix or scrub credit (for a cost). Thus a Borrower who had bad credit yesterday could have good credit today and hence qualify for a loan that they otherwise might not.
5) Loss of Jobs / Downsizing – This is a huge culprit in Michigan who’s economy is staked to the once big three automotive firms. People who are use to making six figure incomes and who based their home buying on said income are in peril with a reduction of hours or losses of jobs altogether.
6) Increase cost of everything – Gas, groceries, clothing. Everything has gone up significantly in cost without a commiserate increase in earnings. Accordingly, people’s disposable cash flow is weakened and getting weaker.
7) Loss of Negative Stigmatism Associated with Bankruptcy / Foreclosure – There once was a time when having poor credit, filing bankruptcy, or losing your home to foreclosure was almost like walking around with a scarlet “A” on your chest. It use to be very hard to get credit again after these negative events. Nowadays that is clearly not the case.
Certainly there are many other factors that have led to the demise of the home mortgage industry – this is just a few that I usually point to. I am also asked if there is a good avenue to find out about foreclosed houses in your market to find some great deals for purchase. The best options are to call your local banks and mortgage companies and ask for the ORE (Other Real Estate) Department or I have used the attached site which is a wonderful reference of properties for sale in the market (https://paydotcom.com/r/12161/dvowler/19170267/).
The only way for the real estate market to head back in the right direction is for houses to start selling and while these will be at a discounted price, at least assets will be moving. This will eventually cause there to be less houses for sale on the market and as that happens eventually the house values will start to inch back up in value (supply and demand). Not going to happen overnight unfortunately.
posted by BIVO @ 8:25 PM
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