The Facts of Life: Foreclosures in
a time of recession
By Steve Taylor
Can you imagine seeing your name in the Public Notice section of the local newspaper advertising your home in a pending foreclosure sale? Don’t laugh, because this can happen to anybody, no matter how well insulated from financial hardships most people assume they are. It only takes some unexpected setback, like a job layoff, divorce or personal injury, to drive a family into the unwilling arms of the bank repossessor. And in Georgia, a non-judicial foreclosure state, the process is relatively simple and quick.
Unfortunately, real estate foreclosures are a necessary evil in the mortgage process. As collateral for a lender, the real property is the assurance that the loan will be paid back in full. A regrettable byproduct of this financial relationship for the consumer can be ruined credit, bankruptcy, foreclosure and loss of the family home if the loan isn’t paid back. The bank, unfortunately, then gets stuck with the house. According to an interview with mortgage analyst Keith Gumbinger of HSH Associates by Patrick Barta of The Wall Street Journal, “Lenders don’t want to own real estate.” This is the nature of lending and the risk for a lender as Gumbinger points out, “Owning real estate means they have nonperforming assets, and nonperforming assets are also known as losses.”
A lot of factors contribute to foreclosure, but many are present in the original loan itself. With historically low interest rates pushing housing demand and real estate values stratospherically higher, many Americans are getting into homes that ten years ago they never would have dreamed possible. Sandra Fleischman, a writer for The Washington Post, reports that during the recent refinancing frenzy, “…a greater number of borrowers have paid more that they can afford either to buy or refinance a house…” Loans that offer minimal documentation, no down payments, or 125 percent equity of the homes value, attract many first time buyers but retain little incentive for the buyer to pay off the loan when trouble arises. These types of loans correspondingly have a much higher delinquency and eventual failure rate. With so little out of pocket money invested in their house, many homeowners simply walk away from their mortgage when things get bad.
And things have gotten bad in the last year. As more and more Americans find themselves out of work along with depleted stock market accounts, many have increasingly turned to bankruptcy to solve their financial woes. Because bankruptcy is traditionally an indicator of future foreclosures, the increased number of filings nationwide since last summer is a troubling indicator of unpleasant things to come.
This trend has many people in the mortgage industry worried. According to Brad
Reagan, a writer for The Wall Street Journal, “Consumer bankruptcy
filings of all kinds are at record levels…” and he also points out
that “recent statistics showing that a record 1.2 percent of all mortgages
are in foreclosure, suggests that the mortgage splurge may have been overdone.”
That is an apparent understatement, because many of the bankruptcy filings are
a direct result of the vast amount of credit card debt accumulated in the 1990’s
and the recent wave of refinancing used by some consumers to pay off bills.
Incredibly enough, many consumers then acquired new credit cards and began to
accumulate more monthly debt. According to Reagan, refinancing and home-equity-loans
account for a “good chunk” of consumers “… who are juggling
debts and who took advantage of today’s easy refinancing and home-equity-loan
opportunities to extract more cash from their house.”
Many factors have contributed to the current sorry state of affairs in home ownership: Predatory lending practices; home-equity-loans for quick cash, aggressive mortgage marketing; a tremendous housing market driven in part by the stock market collapse; the transfer of financial assets to real estate and the most extensive refinancing boom in the nation’s history. Singularly, these events normally wouldn’t pose a severe strain on the U.S. economy, however; acting in conjunction with one another, they constitute a considerable menace to the ultimate well being of the nation.
These combined forces have produced a roaring housing market and inflated values of real estate nationwide. This, in turn, has created localized “bubbles” in some markets. Housing now appears to be the economic engine driving the country; the danger is that if the bubbles burst, then the whole country could slip into a deep recession. Says Maryan Chilinguerian, a writer with The Washington Post, “Some analysts are speculating that the housing market is a bubble that will burst like the stock market. They point to a jump in foreclosures and delinquent mortgage payments as evidence that many who have entered the housing market cannot afford to stay.”
So what will the future bring? As many of the existing loans that originated in the recent flurry of refinancing and equity lines become delinquent, and more and more lenders begin foreclosure proceedings, Americans caught in a financial bind need to seek means other than bankruptcy and foreclosure to cure their financial woes. The U.S. Department of Housing and Urban Development (HUD) offers some helpful guidelines on their website at, http://www.hud.gov, for avoiding foreclosure. First, and foremost, is to “not ignore the letters from your lender” when difficulties first arise because this only serves to compound the problem. Second, remain in your home and seek counseling from an approved agency who can help chart a path through the confusing financial landscape. Possible options for troubled consumers include a special forbearance, which is a “repayment plan based on your financial situation” and mortgage modification of the original loan by refinancing the debt and loan terms.
Are Americans mortgaging their future away and sitting atop a speculative real estate bubble that’s just waiting to burst? If so, foreclosures could be the trigger that finally shatters the housing market and drives the country into a serious recession. Notes Terri Cullen, a writer with The Wall Street Journal, “…the recessions of the late ‘80s and early ‘90s…” were preceded by “the formidable force of a bursting bubble.” Clearly then, Americans should live within their means and heed the warning signs before economic disaster arrives again.
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Steve Taylor is an English major at Kennesaw State University and has studied
Science and Management at Georgia State University. He currently works in the
real estate field; is an appraisal graduate and has a Georgia Associate Broker
license.
Copyright © 2002 by Steve Taylor. All rights reserved.
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