California Foreclosures More Than Double Record From Last Downturn
Don't miss this Los Angeles Times article about foreclosure rates in California. In the last quarter of 2007, there were 31,676 foreclosures, more than twice as many as the previous record from 1996. Additionally, foreclosures have occurred in neighborhoods that experienced few foreclosures in past downturns. Rates of default are also at an all-time high for California.
The article mentions sub-prime lending to those with poor credit as a possible cause, but does not discuss predatory lending or lender abuse. The other flaw is that numbers of foreclosures and defaults are measured in absolute terms, instead of per capita or by percentage of homeowners. Nevertheless, it is clear that the situation in California is a bad one for homeowners. The article explains that the 1996 figure comes from the end of a recession, suggesting that there may be worse to come.
I think we need to look beyond foreclosures and add in the number of home "owners" who will be able to make payments so long as they maintain the appropriate income level but now have negative equity on their homes. These people are locked into their house until they get back on the plus side and--even then--they could be many years behind where they thought they would have been in terms of cash-out equity. It's not the end of the world for them, but I'd like to see someone assess the long-term impact on the housing market.
I have a friend who works for Household finance and he says that if you combine...
1) the number of mortgage holders who are (or will soon be) unable to meet payments (i.e., active and eminent foreclosures) PLUS
2) the negative equity of those who will not end up in foreclosure PLUS
3) the number who own homes that are larger and/or more expensive than the owners will want to own five years from now (i.e., mostly people nearing retirement who will have to downsize their empty-nest McMansions),
...you will find a market that is as much as 50% over obligated. Scary numbers, but no one is really crunching the big numbers. Funny, my friend told my wife and I not to buy a house a few years back unless it was for flipping. Not our bag, so we stayed on the sidelines. Like Benjamin Graham said: "Where wise men begin, fools end up."
January 23, 2008 1:07 PM | Reply | Permalink
With horror stories like this, what are potential mortgage borrowers now supposed to do? They are scared to death that they will be the next victims of predatory lending!
I am a former senior loan officer for a regional mortgage bank. It made me sick to see how we took advantage of consumers for thousands of extra dollars. Sometimes these were smart people who simply didn't know any better. So I developed this simple Mortgage Loan Comparison Worksheet. If borrowers just used this easy tool when shopping for a mortgage, predatory lending in this country could virtually be eradicated:
http://www.januspresentations.com/MortgageLoanComparisonWorksheet.pdf
Problem is, most borrowers only make a decision once every seven years, so how would they even know what to look for? As a loan officer, my mission was not to educate, but to get a signature on the bottom line, at any cost.
As my "penance" I wrote a book entitled Kickback: Confessions of a Mortgage Salesman, now one of the best-selling books on mortgages on Amazon.com. Please let me know if I can help you with information for any further articles.
In my book, I list the Top 10 Mistakes Mortgage Borrowers Make:
1. Not knowing which mortgage fees the borrower can -- and cannot -- negotiate.
2. Choosing and trusting the first loan officer the borrower interviews.
3. Using an interest-only or "payment option" adjustable-rate loan primarily to qualify for a more expensive house than the borrower could normally afford.
4. Thinking the interest rate is always the main thing.
5. Not comparing the final fees listed on the closing documents to the up-front estimates to avoid the lender "packing the loan" with added-on fees without the borrower's knowledge.
6. Not knowing if the mortgage has a pre-payment penalty - until it's too late.
7. Thinking that renting is always just throwing money away.
8. The borrower does not know if he or she is paying a back-end yield spread or Service Release Premium.
9. Paying for mortgage life insurance, credit insurance or other expensive lender add-ons to increase the amount of kickbacks the lender can receive from various vendors.
10. Paying hundreds of dollars to have a company set up a biweekly mortgage payment plan, something the borrower can generally do for herself or himself -- for free.
January 24, 2008 3:58 AM | Reply | Permalink
Thanks, I passed this on to someone who needs it.
I think the answer is no but can you, or anyone else who might know, tell me if assumeable loans are any longer available and should a buyer shop for one.
January 24, 2008 9:07 PM | Reply | Permalink
Re: With horror stories like this, what are potential mortgage borrowers now supposed to do? They are scared to death that they will be the next victims of predatory lending!
Get a conventional fixed mortgage, preferrably with a 30 year term, and either an FHA guarantee (for people with minimal down payment ability-- i.e., first-time buyers) or a reasonable downpayment. No ARMs, no Interest Only loans, definitely no negatively amortizing loans. Default rates for conventional fixed mortgages are still well within historical norms. And if you can't afford to buy a house under those circumstances, then rent one. A second piece of advise: avoid home equity loans and credit lines like the plague, unless you have a very specific (or very necessary) home improvement planned. Do not transfer student loans, medical bills, credit card debt or a car loan onto a HELOC, let alone use one to fund consumption.
January 24, 2008 6:08 PM | Reply | Permalink
I live in the LA area. Without HELOCs, the lifestyles people are used to living around here would be impossible for many to live. With stagnant median wages, the temptation to take HELOCs to keep up with all the rest of the wealth here (much of it, I suspect, created by HELOCs) is strong.
I suspect that consumer spending is going to shrink pretty drastically here.
January 25, 2008 1:10 AM | Reply | Permalink
A second piece of advise: avoid home equity loans and credit lines like the plague, unless you have a very specific (or very necessary) home improvement planned.
I have an equity credit line for emergencies only. The interest rate is one point below prime, so it's better than a credit card. If you had an emergency and needed quick cash you wouldn't want to spend the time and trouble to get a loan, so it's there if you need it. I have zero credit card debt, so it works for me. I understand that it might not work for others if they're the kind who can't resist temptation.
January 25, 2008 10:38 AM | Reply | Permalink