Friday, August 10, 2007

Who is at Risk of Losing Their Home

As a housing counselor for a HUD-approved Housing Counseling Agency, I see first-hand the growing problem of home foreclosures. Unfortunately we can expect more increases in mortgage defaults for sometime to come. It is estimated as many as one out of five subprime loans issued during 2005-2006 will fail and borrowers will lose $164 billion in wealth due to foreclosures.

I counsel about eight people a week who are on the verge of losing their home. While my experience is not a scientific sampling, I observe three categories of people who are at risk of losing their home and see the categories about evenly split between the three.

(1). Bad things happen to Good people: Illness, lost of job, divorce, and loss of income or unplanned increase in expenses.

(2) Irresponsible homebuyers. Customer took out loans they could not afford. People in this category often could have qualified for a $90,000 house with a good loan, but instead got an adjustable rate mortgage or some other "creative financing" so they could buy a $150,000 house. Many people fail to build any saving, live payday to payday, living beyond their means and little bump in the road puts their home at risk. They feel entitled to a nice home and a new car. While working with one couple on their budget, I asked them why they had taken on such a large care note. The new mother explained to me, “Well, I got pregnant, and we had to have an SUV”.

(3) Predatory lending and poor lending practices are the third cause of people losing their home. I have witnessed inflated appraisals, phony "gift letters", falsified income, and people having their loan product switched the day of closing and then being pressured into closing. I recently had a client who had been "flipped" (refinanced) five times, each time losing equity in her home. After the fifth time she could not be refinanced anymore and her gross annual income was actually less than the total of her annual house payments.

Part of this problem will self-correct, as the market of available sub-prime loans dries up and few new borrowers will find the same easy credit available. However, there is a need for reform. We need new laws against predatory practices. We need vigorous enforcement of existing lending laws and prosecution of offenders. We also need basic financial literacy taught in schools and we need policies that encourage savings. But, more than anything, we need a change in societal attitudes so that people don’t feel ‘entitled’. No one owes you a new SUV and if you can only afford a $90,000 home, you are not entitled to a $150,000 home.
To seek advice on avoiding foreclosure, contact me.

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