Big Trouble Ahead for Mortgage Borrowers?A study by the folks at the Center for Responsible Lending forecasts that as many as 2.2 million homeowners will lose their homes to foreclosure in the next few years. Even if they are off by a million homes, this level of activity will have devastating consequences to the communities in which those homes are located. You can see foreclosure statistics for your own community online. Whatever the foreclosure rate nationally, it will be worse in some areas than others. Areas with high rates of job formation and reasonable property values will be able to absorb foreclosed homes without much problem. In other communities, adding fifty or one hundred distress sales to the list of homes already on the market will have a terrible effect on values. Some guy who just wants to sell his home may have to wait until all of those bank-owned properties sell before he can sell his. What is likely to happen to homes that go into foreclosure? My guess is that it will not be as bad as people think it is. My predictions might apply to one community but be totally wrong in the next community down the road. What I know is that those lenders, starting with Fannie Mae and Freddie Mac, do not want those homes back. It is expensive to evict someone who does not want to leave, and then they get a home that may have been trashed by the angry owner. Then they have to fix up the home to make it marketable. They’ll probably have to paint and re-carpet. Then they will have to list it for sale at a lower price for a quick sale and pay a real estate agency commission. This is a money-losing proposition! Who do they get as a buyer? Someone who probably wasn’t any better qualified than the guy they kicked out! So what’s the point? For that reason, I think that we’ll see a lot of creative steps being taken by lenders to help homeowners keep their homes, even those who made stupid mistakes. It’s very moralistic to stand up and talk about someone having made a “promise to pay,” but the reality is that the lending industry has pushed some stupid programs on unqualified people, loans that were practically guaranteed to get borrowers in trouble. Those pigeons will come home to roost. The big question is, “Who are the pigeons going to “soil” when they get home?” The ones who happen to live in areas where there has been appreciation since they purchased their homes might have enough equity to be in a position where they could refinance into a more sensible loan. For those who have the option to do so, the goal is to get off of the higher interest rate variable loans and into something that is fixed for as long as they are likely to own the home. Maybe that is only 5 years, or maybe it is a 30 year fixed rate loan. These days -- early 2007-- the yield curve is flat, meaning that long-term rates are almost the same as short-term rates. Therefore it is relatively cheap to get long-term protection, and a 30-year fixed rate loan is a great option. Homeowners who find themselves in a bad position and who do not do anything to correct it will find themselves in deeper trouble. They will lose their homes and ruin their credit rating. But for the reasons outlines above, lenders do not want the home back. In fact, most lenders will go to extraordinary lengths to avoid foreclosing on a home and booting out the owners. Most lenders offer payment reduction plans and payment deferment plans, trying to do everything they can to help out a family in trouble. Other lenders will offer to refinance their clients into another loan that is just as stupid as the one they are currently in, but one that goes back to a low payment rate like the one they started out with. The lender will make $4,000 in refinance fees, tacking it onto the loan principal, thus creating an even deeper hole that the client has to climb out of. What’s the purpose? Well, at least the owners get to stay in the home. At some point in time, the owners will either make more money so they can afford to make a full payment or the home will go up in value enough to allow them to sell and get out without damaging their credit. Industry sources tell me that at least 50% of the people who get in trouble don’t bother calling their lender to ask for help. In my mind, that is incredibly short-sighted. If you are in trouble, pick up the phone and make the call. Finally, there is simply no substitute for acting sensibly when it comes to financial affairs. Don’t spend more than you make. Don’t run up credit cards, and if you have balances that you can’t pay off monthly, pay enough every month to get rid of them in a year or so. Make all payments when they are due and teach your kids to do the same.
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