Wednesday, October 01, 2008

The housing and foreclosure crisis

A friend recently asked me who this foreclosure crisis affects the most in our area. Angry about the bailout going towards large companies and reading things about relatively wealthy speculators who've already spent much of the sub-prime cash-out REFINANCES now being foreclosed on, he was wondering if this bail-out was really directed towards a crisis in the real middle class of our country or towards investors and the more well to do. This was my discussion:

From what I have seen, the vast, vast majority of the problem in our area seems to be with the more moderate and lower priced properties (read: lower income buyers), particularly in the minority set, even more so in the Hispanic set. I cannot tell you how many houses I see where the last name of the defaulting owner is a Hispanic last name - it's tragic. It is SO overwhelming in this area that it's hard to comprehend. Even sadder are the conditions of the home (sometimes heartbreaking conditions with multiple families living in them with tons of kids, sometimes just not kept up, sometimes purposely ransacked by the angry owners before foreclosure (missing appliances, feces etc.). (See the Washington Post article by Nick Miroff, March 23rd, 2008, "N.Va. Foreclosures Form 'Ring of Fire'; Chain of Housing Crisis Hot Spots Indicates Disparity in Market Downturn" for some interesting demographics.)

As far as high value properties go? Generally not so many, though they do exist. When that's the case, it is often either investors or second home owners.

Now, what I care even more about....who to blame?

I personally think that they whole run-up of easy financing was a bigger factor than out and out fraud by the buyer. There are some people who knew very well what they were doing (like those who overstated their income so they could qualify for a loan). These tend to be the savvier buyers....people who have done it before and people who tend to have higher incomes (and often higher purchase prices). These people know what they have to do and say to get the money they want, and they went for it with gusto. I have a colleague who was helping a couple buy a 1.8 million dollar home who called her 2 DAYS before settlement to say they didn't think they'd be able to close.... And why? Their 1.6 million dollar home was being foreclosed on, and they couldn't afford it. This man LIED, LIED, LIED and was in such denial. But I digress, this is not the norm....

From what I've seen in the last 5 year, I tend to think that the majority of fraud and outright chicanery came by way of the lenders.....banks who wanted to make money with little regard for the people to whom they lent money. Their detachment from the process after the loan closes only exacerbates this (see also: slicing and dicing of loans). In many cases, the worst hit are lower income buyers and those with lower financial acumen. Many of these don't even understand our language well. You add that to completely different lending/mortgage process in their home countries, and you have easy prey.

I cannot believe how easy it was to get a mortgage for those who could barely afford it, for those who would have no cash reserves left after their purchase etc....I mean really, some things are just common sense. But even my better-educated clients who were going to be in homes for longer periods of time seemed to think that ARMs and interest-only adjustable loans and the like (don't even get me into negative amortization loans) were good ideas because they didn't understand what would or COULD happen if the real estate market turned away from the rosy side. And nobody seemed to be trying to explain any of it to them. There certainly weren't (and aren't) any regulations on disclosure of payment hikes after teaser or temporarily fixed periods ended, and I find that incredibly unethical.

I would also go to settlements and see people looking over their 'applications' - ones they were asked to sign again at settlement, and they would have totally different and made up information on them, filled in by the lender. And then, if they didn't sign it or if they corrected the information, they wouldn't get the loan and would set themselves up for litigation from the sellers for non-performance. Part of the problem is that it was in a bank's interest not to provide Good Faith Estimates from the get go, as they are required to do by the RESPA laws. The GFE provides buyers with very basic information regarding what their loans will cost, what their rate and payments are etc. I think most lenders never did this (leading to the VERY hilarious standard form in every loan package now requiring you to WAIVE your right to get the GFE within 3 days of your application - can you say CYA?). The bigger problem is that even this very basic piece of information didn't have the next most important piece of the cases of interest only loans and negative amortization loans (which no one ever understands), what will the payments be when the loan adjusts? What are the minimums and max amounts? No bank ever provided this information because they wouldn't want to scare the loan applicants with really, really big numbers. It is crazy. This is where Ralph Nader and his consumer protector laws come to play.......we DO need some really basic regulation with our banks - somehow regulating the whole process of application, disclosure and education, and this needs to be provided in an easily understandable format, in an applicant's native language if possible (some of the WORST fraud happened with immigrants who had NO IDEA what they were signing), and this needs to be done way before closing. Of course, we do have some of the RESPA laws now, but the problem is, it isn't enforced.

Now, going back to demographics: I doubt the rest of the country's foreclosures differ than much from our area is because, first, interest rates haven't changed that much - they really haven't. Even those with adjusting mortgages haven't been hit as hard as they could be. That said, who will small changes affect the most? Those with no reserves, those on the lower end of the income scale. As our economy worsens, this is particularly true for those that depend on work in the construction industry and those who don't have permanent jobs - again, back to the immigrants. When they lose their jobs, they can't pay their mortgages (and let's face it, they weren't in stable positions to begin with). It's not that much the rise of the interest's the worsening/instability of the economy for this sector of workers.

in the past, borderline less well-to-do folks just wouldn't get a loan, certainly not a loan for a house, and now instead of simply having to move to a smaller apartment or in with family when bad times hit, they get foreclosed because they actually have their own house.

Second, people with more money often tend to understand what they're getting into better (generally, if you assume higher income = higher education) and thus tend not get themselves more easily into things that they can't handle. But even there, some smart people get caught on hard times. We've recently just seen this happen to a friend of ours
(who has a couple kids and a not-so-fancy primary house). Part of this person's problem was not a lack of smarts but a lack of financial savvy. It is just too complicated. If you aren't in the industry, it can be a very confusing scenario for a lot of people.

Don't get me wrong, I am a huge believer in personal responsibility - there was definitely fraud out there, and there were definitely people overextending themselves. I just happen to have seen the most egregious misbehavior and fraud out there with the lenders. Don't even get me started on the whole appraisal industry (a subset of the lending industry). That's another part of the process that needs serious overhaul. And let's face owner is responsible only for their own home and well-being, not the financial well-being of massive companies, thousands of jobs, the general health of our economy.....

In the end, I don't think that we will ever recover and prevent this from occurring again without real regulations and oversight with teeth.


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