How to avoid falling in a foreclosure sinkhole
How to avoid falling in a foreclosure sinkhole
October 16, 2005
BY SUZETTE HACKNEY
FREE PRESS REAL ESTATE WRITER
The initial advice all credit counselors give to homeowners facing foreclosure is
"When you find yourself in a hole ... stop digging."
Good advice, considering that more than 6% -- or 86,380 -- of Michigan's mortgages have been past due so far this year, according to the Mortgage Bankers Association of America. And the state's foreclosure rate is 50% higher than the national average.
Why so many here? Financial experts cite three principle reasons:
•Midwest residents in general, and Michigan residents in particular, are struggling financially because of the loss of many high-paying manufacturing jobs, including those in the auto industry, said Doug Duncan, senior vice president and chief economist for the bankers association.
"The single most important determinate of delinquency is lack of job growth," Duncan said.
•Some homeowners facing foreclosure overextended themselves by taking advantage of looser credit restrictions, the combined buying power of two incomes and creative financing products to buy more house than they can afford in the long term. Often, when one of the breadwinners is laid off or faces a health crisis, there is not enough cash flow to meet mortgage commitments.
•Metro Detroit is unlike many other metropolitan areas where housing markets are booming and home prices are shooting through the roof. In metro Detroit, home values rose less than 1% during the past year to a median price of $151,000. But in states like Florida and California, and areas like Chicago and Washington, D.C., housing values appreciated as much as 40% in the past year. If homeowners in those markets were to sell a house, they would make a small fortune. Those profits effectively serve as a ladder to allow the homeowners to climb out of the debt hole they've dug -- even if they are carrying multiple home equity loans.
Enabling a fall
Mike Shannon is a Realtor and foreclosure specialist with Re/Max Preferred in Dearborn Heights. He handles foreclosure sales for more than 60 banks in southeast Michigan.
He acknowledges that the state's stagnant economy and the struggling auto industry are driving the high number of foreclosures, but he also cites poor consumer decisions, such as lack of budgeting and overspending, for the problem. Another culprit, Shannon said, is the prevalence of sub-prime lending programs -- those that help borrowers with bruised credit obtain mortgages at higher interest rates -- and no-money-down, interest-only mortgages.
"The leniency in lending leaves people in jeopardy, especially when they're doing 100% financing -- using 80% as the primary mortgage and a 20% equity line," he said. "It really becomes a problem if that financing is based on a two-person income household and something happens."
Those who have sub-prime loans or creative financing often struggle to make payments as the terms adjust and payments increase over time. Most often the process of foreclosure begins when a homeowner misses three mortgage payments and the loan is considered in default. Most delinquencies and foreclosures occur early in the life of the mortgage and peak at the period between 3 and 5 years.
Nationally, 10% of subprime borrowers are late with their mortgage payments, while 3% of all sub-prime borrowers are in foreclosure, according to the mortgage bankers group. In Michigan, nearly 16% of sub-prime borrowers are delinquent and 9% are seriously delinquent or in the foreclosure process.
Federal Reserve Chairman Alan Greenspan said late last month that he is becoming increasingly concerned about the way Americans are buying homes. Greenspan, speaking via satellite to the American Bankers Association convention in Palm Desert, Calif., said interest-only mortgages, 40-year mortgages and ARMS -- adjustable-rate mortgages that permit borrowers to decide how much to pay, how long the loan term should be and when they can convert between a fixed rate and a variable rate -- are troublesome.
"These products could be cause for some concern both because they expose borrowers to more interest-rate and house-price risk than the standard 30-year, fixed-rate mortgage and because they are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices," Greenspan said.
"In the event of widespread cooling in house prices, these borrowers and the institutions that service them could be exposed to significant losses," he said.
Still, Tim Ross, president of Ross Mortgage Co. in Royal Oak, said many of the creative products were designed for home purchasers who had unique circumstances and could manage the mortgages effectively, such as individuals who received a bonus at a certain time of year.
As these products became more available, he said, they were used widely for people who just needed to qualify for financing. And that's when the problems started.
"The real issue today is not about being able to qualify for the financing. The issue is an inability to accumulate the money for a down payment or closing costs," Ross said. "That is why these products have appeal to many. There are hundreds of products out there and available through us. Using them has more to do with your goals, your situation and your lifestyle. We talk to our clients about making a smart choice."
Saving the house
David Trott, managing partner of Trott & Trott, a Bingham Farms law firm that represents banks during the foreclosure process, said lenders want to avoid foreclosure at all costs because "it's the right thing to do, both altruistically and economically."
"We represent every major bank in the country," he said. "Every bank has a loss mitigation or homeowner assistance department. The whole point of those units is to help people stay in their homes. These lenders absolutely do not want to foreclose. Foreclosure is a loser for them. They will always lose money.
"It's difficult to convince people that their mortgage lender is not like other creditors, and there's really a big incentive for the lender to work with the borrower," he said. "If you get behind with Visa or another credit card company, they play hardball because they don't have any good solutions. Mortgage lenders have a lot of options."
City officials across the country are recognizing the benefits of working with people who are trying to save their homes. This spring, the City of Detroit formed a partnership with nonprofit community groups and mortgage lenders to establish a help line for those in danger of defaulting on their mortgages. Called Detroit Home Ownership Preservation Enterprise, or HOPE, program officials set a goal to help 500 homeowners in the first year set up action plans to avoid foreclosure. Assistance includes contacting lenders, employment resources and credit counseling. The service is available anytime by calling 888-995-4673.
Shannon, the Dearborn Heights Realtor, said many people fail to adjust to a new home and mortgage payments before they start racking up credit card and other debt. He recommends a stringent budget for any new homeowner.
"If you go in many of these houses in foreclosure, you're going to find new furniture, you're going to find big-screen TVs with cable, you're going to find newer cars, a BMW and Lexus in the driveway," Shannon said. "What these people don't realize is that they were upside down from day one. They've gotten into the house with less than 3% down, and sometimes they're putting no money down at all. They've even rolled the closing costs into the mortgage.
"Even if they wanted to sell to get out of a bind they can't, because they owe more than they have equity," he said. "It was all a disaster from the beginning."
Contact SUZETTE HACKNEY at 313-222-6614 or hackney@freepress.com.
October 16, 2005
BY SUZETTE HACKNEY
FREE PRESS REAL ESTATE WRITER
The initial advice all credit counselors give to homeowners facing foreclosure is
"When you find yourself in a hole ... stop digging."
Good advice, considering that more than 6% -- or 86,380 -- of Michigan's mortgages have been past due so far this year, according to the Mortgage Bankers Association of America. And the state's foreclosure rate is 50% higher than the national average.
Why so many here? Financial experts cite three principle reasons:
•Midwest residents in general, and Michigan residents in particular, are struggling financially because of the loss of many high-paying manufacturing jobs, including those in the auto industry, said Doug Duncan, senior vice president and chief economist for the bankers association.
"The single most important determinate of delinquency is lack of job growth," Duncan said.
•Some homeowners facing foreclosure overextended themselves by taking advantage of looser credit restrictions, the combined buying power of two incomes and creative financing products to buy more house than they can afford in the long term. Often, when one of the breadwinners is laid off or faces a health crisis, there is not enough cash flow to meet mortgage commitments.
•Metro Detroit is unlike many other metropolitan areas where housing markets are booming and home prices are shooting through the roof. In metro Detroit, home values rose less than 1% during the past year to a median price of $151,000. But in states like Florida and California, and areas like Chicago and Washington, D.C., housing values appreciated as much as 40% in the past year. If homeowners in those markets were to sell a house, they would make a small fortune. Those profits effectively serve as a ladder to allow the homeowners to climb out of the debt hole they've dug -- even if they are carrying multiple home equity loans.
Enabling a fall
Mike Shannon is a Realtor and foreclosure specialist with Re/Max Preferred in Dearborn Heights. He handles foreclosure sales for more than 60 banks in southeast Michigan.
He acknowledges that the state's stagnant economy and the struggling auto industry are driving the high number of foreclosures, but he also cites poor consumer decisions, such as lack of budgeting and overspending, for the problem. Another culprit, Shannon said, is the prevalence of sub-prime lending programs -- those that help borrowers with bruised credit obtain mortgages at higher interest rates -- and no-money-down, interest-only mortgages.
"The leniency in lending leaves people in jeopardy, especially when they're doing 100% financing -- using 80% as the primary mortgage and a 20% equity line," he said. "It really becomes a problem if that financing is based on a two-person income household and something happens."
Those who have sub-prime loans or creative financing often struggle to make payments as the terms adjust and payments increase over time. Most often the process of foreclosure begins when a homeowner misses three mortgage payments and the loan is considered in default. Most delinquencies and foreclosures occur early in the life of the mortgage and peak at the period between 3 and 5 years.
Nationally, 10% of subprime borrowers are late with their mortgage payments, while 3% of all sub-prime borrowers are in foreclosure, according to the mortgage bankers group. In Michigan, nearly 16% of sub-prime borrowers are delinquent and 9% are seriously delinquent or in the foreclosure process.
Federal Reserve Chairman Alan Greenspan said late last month that he is becoming increasingly concerned about the way Americans are buying homes. Greenspan, speaking via satellite to the American Bankers Association convention in Palm Desert, Calif., said interest-only mortgages, 40-year mortgages and ARMS -- adjustable-rate mortgages that permit borrowers to decide how much to pay, how long the loan term should be and when they can convert between a fixed rate and a variable rate -- are troublesome.
"These products could be cause for some concern both because they expose borrowers to more interest-rate and house-price risk than the standard 30-year, fixed-rate mortgage and because they are seen as vehicles that enable marginally qualified, highly leveraged borrowers to purchase homes at inflated prices," Greenspan said.
"In the event of widespread cooling in house prices, these borrowers and the institutions that service them could be exposed to significant losses," he said.
Still, Tim Ross, president of Ross Mortgage Co. in Royal Oak, said many of the creative products were designed for home purchasers who had unique circumstances and could manage the mortgages effectively, such as individuals who received a bonus at a certain time of year.
As these products became more available, he said, they were used widely for people who just needed to qualify for financing. And that's when the problems started.
"The real issue today is not about being able to qualify for the financing. The issue is an inability to accumulate the money for a down payment or closing costs," Ross said. "That is why these products have appeal to many. There are hundreds of products out there and available through us. Using them has more to do with your goals, your situation and your lifestyle. We talk to our clients about making a smart choice."
Saving the house
David Trott, managing partner of Trott & Trott, a Bingham Farms law firm that represents banks during the foreclosure process, said lenders want to avoid foreclosure at all costs because "it's the right thing to do, both altruistically and economically."
"We represent every major bank in the country," he said. "Every bank has a loss mitigation or homeowner assistance department. The whole point of those units is to help people stay in their homes. These lenders absolutely do not want to foreclose. Foreclosure is a loser for them. They will always lose money.
"It's difficult to convince people that their mortgage lender is not like other creditors, and there's really a big incentive for the lender to work with the borrower," he said. "If you get behind with Visa or another credit card company, they play hardball because they don't have any good solutions. Mortgage lenders have a lot of options."
City officials across the country are recognizing the benefits of working with people who are trying to save their homes. This spring, the City of Detroit formed a partnership with nonprofit community groups and mortgage lenders to establish a help line for those in danger of defaulting on their mortgages. Called Detroit Home Ownership Preservation Enterprise, or HOPE, program officials set a goal to help 500 homeowners in the first year set up action plans to avoid foreclosure. Assistance includes contacting lenders, employment resources and credit counseling. The service is available anytime by calling 888-995-4673.
Shannon, the Dearborn Heights Realtor, said many people fail to adjust to a new home and mortgage payments before they start racking up credit card and other debt. He recommends a stringent budget for any new homeowner.
"If you go in many of these houses in foreclosure, you're going to find new furniture, you're going to find big-screen TVs with cable, you're going to find newer cars, a BMW and Lexus in the driveway," Shannon said. "What these people don't realize is that they were upside down from day one. They've gotten into the house with less than 3% down, and sometimes they're putting no money down at all. They've even rolled the closing costs into the mortgage.
"Even if they wanted to sell to get out of a bind they can't, because they owe more than they have equity," he said. "It was all a disaster from the beginning."
Contact SUZETTE HACKNEY at 313-222-6614 or hackney@freepress.com.
posted by Victor Caballero at 7:55 AM
<< Home