Foreclosure Oncology: Separating Facts From Fixins

By Guest Author Fritz Pfister 

Solutions to the Foreclosure Dilemma

The news is full of stories about the impending explosion of foreclosures when homeowners who have adjustable rate mortgages have their rates increased under the terms of the mortgages they voluntarily signed at purchase. Let’s examine this phenomenon.

The country experienced the greatest real estate market for the number of sales in history from 2001 through 2005. The Fed lowered interest rates to levels of the 1960’s in an effort to pull the country out of mild recession, and the financial shock of 9-11. The Bush tax cuts simultaneously pumped money into the economy when families were allowed to keep more of the money they earned. This combination established a recipe for growth. It succeeded, and the government now has more revenue flowing into D.C. than ever before in our history, only to be squandered by over spending.

During this period of growth money was cheap to obtain and consumers that had been priced out of the housing market could then afford to purchase a home. During this five year record spurt in home sales the buyer pool was made up of a majority of well qualified buyers. When demand started to become satisfied as a natural consequence of record numbers of buyers purchasing, the credit quality of the buyer pool was lowered.

To keep the loan machine pumping out loans many lenders lowered qualification standards and made millions of loans to people that normally would not qualify. An untold number of people were made loans that should not have been buying a home. That is what is known as the sub prime market.

Investors recognized the opportunity the real estate market offered and hence “flippers” became a household word across America. As in all run up economic opportunities there were savvy investors, and novice investors. Think of the tech bubble in the stock market that burst. Do you think the late comer novices were the biggest losers or the savvy investors who were selling as they sensed the top was near? Same true in the flipper markets.

The negative effect of the investor infusion into the single family market was the artificial run up in prices. While savvy investors made millions running up prices, because they could with demand at an all time high, and mortgage money cheap for prospective buyers to afford their overpriced products, it was the working family that got caught in the trap.

Prices had risen to such unrealistic levels that lenders then created loans such as 40 year mortgages, interest only mortgages, and adjustable rate mortgages with too good to be true beginning “teaser rates” for families to be able to qualify to purchase a home. 

There should be more investigation into foreclosed properties. It is my contention that the majority of foreclosed properties currently on the market were vacant before foreclosure and no family was put on the street. Most of the properties were owned by builders of new homes, or novice investors caught holding the bag at the end of the pyramid scheme built by savvy investors. Builders know the risks of the market, novice investors learned the hard way.

The president has proposed that lenders can voluntarily freeze the interest rate on adjustable mortgages for up to five years, for families that are current on their payments, and will be unable to afford the payments following the agreed upon increases at time of closing. I would add one more stipulation, the freeze can only be eligible on owner occupied properties. Investors that took out these mortgages should not receive special consideration, and I feel sorry for homeowners who were foolish enough to buy a home before they sold their current home.

I don’t believe freezing the rates is a viable long term solution. What happens when the rate freeze expires? Think of what is going to happen when the Bush tax cuts expire in 2010. In my opinion the vast majority of homeowners that have an adjustable rate mortgage could afford a fixed rate loan with interest rates falling to a two and one half year low the past couple of weeks.

Why don’t these families simply refinance? Because the amount owed that would need to be refinanced is greater than what the home is worth, resulting in the loan being denied due to the short appraisal. Solution; waive the appraisal requirement on refinance for owner occupied homes with adjustable rate mortgages. That won’t cost anyone a dime.

Personally I am against government intervention, however the reality is that this is a main stream media event due to the presidential election year. The media has their favorites they want to help win election. This past week was an example of politicians proposing bailouts for families in foreclosure in an attempt to buy votes. The proposal? Raise taxes on upper income families and then redistribute that money to help families in foreclosure.

I have a better idea. Instead of stealing money from responsible, productive citizens to be redistributed, try this; waive all federal taxes for families facing default if their loans will adjust to a level they cannot afford. These families would then be able to afford to pay for their homes instead of sending the difference making money they have earned to D.C. to be squandered on big government programs.

The result of the subprime collapse, when lenders foolishly lowered standards and made millions of loans to people who had no business buying a home, is being felt in the mortgage markets today with tougher lending standards rapidly falling into place. This will cause short term pain, however long term stability in the housing market.

The result of investors driving up prices that were unsustainable, making adjustable rate mortgages the working families only option for home ownership, is resulting in real hardship. If there is to be any intervention by the government into the foreclosure process, it should be limited to owner occupied homes, with adjustable rate mortgages, by waiving the appraisal requirement for refinancing. Period.

Families that were taken advantage of by predatory subprime lenders should receive their relief in court. That could be a challenge however, because the subprime lenders have disappeared. I feel empathy for these families however it should not be the taxpayers responsibility to pay for their decision to sign the loan papers at closing.

Government should not bail out any lender, or investor. They, of all people, should have understood the risks they were taking, and the taxpayers should not be punished for the risks taken by others.

The best way to avoid a foreclosure is for the homeowner to contact their lender as soon as they realize they will have difficulty making their payment. Lenders will work with these families. Lenders don’t want to foreclose. Lenders are willing to help. The problem is too many families wait until it’s too late for the lender to be able to help.

This entire situation could have been avoided if these troubled home owners would have had professional, ethical representation at the time of purchase from an agent that would have advised their clients to avoid the risks they were taking.

My advice, don’t buy another home until your current home is sold. Don’t finance your home with an adjustable rate mortgage, interest only mortgage, or 40 year mortgage. Don’t buy a home with damaged credit, to avoid paying too high an interest rate. Don’t buy an overpriced home. If you buy an overpriced home today, someday you’ll have to sell an overpriced home. Millions are learning that lesson today. Don’t invest in real estate with the expectation of making a quick buck. Interview and hire an experienced, ethical agent to advise you in your home purchase, or sale.

To do otherwise is risky, and the consequences dire. We are witnessing that today.

 

Fritz Pfister is a licensed Realtor with RE/MAX Professionals Springfield Illinois. Fritz is a leader in the local real estate market and hosts a live one hour radio program, now in its’ 13th year. Fritz’s website is SpringfieldHome.com

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12 Responses to Foreclosure Oncology: Separating Facts From Fixins

  1. […] the rest of this great post here Share and Enjoy: These icons link to social bookmarking sites where readers can share and […]

  2. Nick says:

    That would be extremely interesting if it’s true that a significant number of foreclosures were always empty. Of course, developers are leaving properties unfinished and unsold, but if residential mortgages were made on these homes and no one moved in at all, it would be a new level of corruption.

    There is already anecdotal and other evidence that individual mortgages, when they are pooled, are put into numerous pools and then securitized. So the same loan may be in several mortgage pools and sold to different investors who believe they own more of the loan than they really do.

    For the past decade at least, the mortgage industry has been a sewer filled with securities fraud, predatory lending, and fraudulent inducement of debt. HUD has been leading the pack in encouraging the fraud, along with Fannie/Freddie, the Fed, the rest of Congress, and the banking industry.

  3. christine says:

    Please go to the website http://www.loansafe.org and go to the forum section. Your comments about lenders being willing and able to work out solutions for the average main street family is not correct. You really need to see what is happening out there, not from a professional standpoint (as someone who wants to sell more real estate) but as a fellow American. Your article does not do justice to the large numbers of families who have been hit by job losses or income curtailment which seems to be the predominant problem regarding delinquent mortgage payments.

    • I totally agree with you – but beware of “helpful” sites like loansafe.org which exist mainly to steer desperate people into the hands of high-priced mortgage brokers who see the foreclosure mess as just another way to make a buck – just like they did during the bubble when they helped steer those same folks into unaffordable loans.

      Beware of modification and refinance scammers!

  4. ADP says:

    Do you plan to waive the MI on these underwater refis? if not, who is going to be supplying it, since I doubt any of the current MI companies will provide it. These refis you propose are going to be seen as very undesireable for investors, and the add ons that will be necessary to make them work will make them unworkable. It’s the same things that happenned to FHA Secure. The program was available, but the pricing was so bad that no one wanted to originate them, and no borrowers wanted to pay the points necessary to get one.

    It’s not just a question about what Fannie will allow. It’s about what the industry is willing to originate, and I don’t see any investors out there being willing to purchase loans that are already guaranteed to be underwater and uninsurable.

  5. SteveP says:

    Christine, WAKE UP! and smell the coffee! Lenders have not only been willing to help struggling homeowners, they have been TOO willing to help struggling homeowners.

    The proof is in the pudding. Specifically, we have learned that the MAJORITY of homeowners that received loan modifications end up redefaulting in spite of the modified terms. This unfathomable redefault rate is indisputable proof that the standards lenders are using to grant loan modifications, like the standards that were used to grant the loans at origination, are far too loose.

    These lenders need to stop approving modification for borrowers who can’t afford their payments at a modified reduced rate, and instead boot these irresponsible idiots out of the homes they can’t afford now and couldn’t afford in the first place. The sooner they are booted out and the homes put back on the market at today’s more realistic prices, the sooner these homes will in turn be purchased by responsible home buyers that can afford the homes they select.

    • Walter Getz says:

      Before ANYONE makes a “know-it-all” comment, they should understand what it is they are commenting on. While I disagree with this post in many ways, I am not here to attack it, and agree with some of the points placed here.

      Just to keep the world informed, the MAJORITY of modifications ARE working, the statistic of showing that 40% of mods wind up back in default does NOT indicate that the MAJORITY are failing. Additionally, this does not take into account all of the modifications that have been made recently that are finally dropping payments to the tune of $100’s per month, making these homes more affordable.

      Should lenders stop providing modifications, we will ALL suffer, we already are paying our tax dollars to fund these programs to MOTIVATE lenders to provide modifications, and to date only 14 lenders have signed onto the Making Home Affordable Plan. These modifications are a much needed remedy, and make sense, or else other lenders who have NOT signed up for this program wouldn’t be providing them either.

      Also, I’m sure you wouldn’t like me calling you an idiot for getting your facts wrong, just like the millions of homeowners out there don’t need to be called idiots for listening and trusting the “professionals” they hired to help them to secure the loan in the first place. We all make mistakes. Your kind of attitude is why the world is changing for the worse, not the better. Didn’t your mother ever tell you, “If you have nothing nice to say, better not to say anything at all.”?

  6. SteveP says:

    Well put Anthony! Any Loan modifocation service that chareges for its service is a rip off, and scam. The only real service these fee charging modification outfits offer is that they have figured out the various lender’s modification standards and they can in turn “doctor up” a defaulted borrower’s financial statements, paystubs, etc to help the defaulted borrower trick the lender into granting an undeserved modification.

    This is the reason why so many slimy, former loan brokers are now in the loan modification business, they have so much experience in doctoring borrower’s financials and equal experience in tricking and defrauding lenders.

  7. Jeremy says:

    This article is ridiculous, much so that it isnt even worth my time to attack each and every uneducated statement in it…This Realtor obviously has no experience in Mortgage Banking, nor Government Intervention. It is naiive individuals like this that stir up unneccessary commotion in the marketplace, highly skewing the facts. This Realtor is a egregious columnist. My suggestion, stick to your day job!

    • OK – So like which parts and what are the problems you see? What are your credentials, and what can you tell us that migh be helpful or enlightening?

      Really, we want to hear what you have to say too.

  8. DavidP says:

    SteveP said: “Christine, WAKE UP! and smell the coffee! Lenders have not only been willing to help struggling homeowners, they have been TOO willing to help struggling homeowners. ”

    This statement is just flat out wrong. The reason they are defaulting in big numbers is that the loan mods they are giving are awful and do not help the person. In fact, most of the ones I have seen related to Option ARM where the payment was 1500.00 going to 3000.00 at adjustment were reduced to 2800.00, which the lender sees as a “big compromise” on their part. The payment shock already killed the consumer and 1500 to 2800 still makes the consumer DOA!

    Read my book on this topic for free at: http://www.loandefects.com/25801.html

  9. Forex news says:

    Nice post! Keep it real.I have looked over your blog a few times and I love it.

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