Foreclosure Activity

Good Morning,

More than 110,000 foreclosure filings were reported nationwide for the second consecutive month in September, when 112,210 properties entered some stage of foreclosure, according to RealtyTrac's "September 2006 U.S. Foreclosure Market Report." September's foreclosure rate was down 1 percent from August 2006 but up 63 percent from a year ago. "Foreclosure filings are up 39 percent year-to-date and already have surpassed the total number reported in all of 2005. If they continue at the current pace, foreclosures will exceed the 1.2 million mark by the end of the year," said RealtyTrac CEO James Saccacio.

In California, foreclosure activity rose 19 percent on a month-to-month basis and has increased more than 40 percent during the last two months, according to the report. With one new foreclosure filing for every 825 households, the foreclosure rate in the Golden State is 1.3 times the national average of one new filing for every 1,030 households. The highest state foreclosure rates were reported by Colorado and Nevada.

A foreclosure usually takes several months from start to finish and most borrowers can solve their financial problems within that period of time. It is important to take preventative action quickly however. Once a lender start the process the clock is ticking.

200 mile day

From my home office in Pilot Hill to Pollock Pines in about an hour trip so I left at 8 o’clock to be at the Home Inspection at 9. At 11 I was with clients for a loan application in Placerville and then back to my office by 1 to return some phone calls and draft a counter-offer on a listing in Camino.

The traffic was backed-up as early as 3:30 for my second trip from Pilot Hill through Placerville on my way to Camino. I needed to review the proposed offer and counter offer with my client, get it signed and then to the other agent. By 5, I was stuck in traffic again in Placerville on my way to Cameron Park. I needed to deliver the counter and meet personally with the cooperating agent to explain the details. Back in Pilot Hill after six, I spent the next two hours returning phone calls, e-mails and shuffling papers.

At the end of the long 200-mile day I am reminded of the parable of the life of a gazelle (small swift antelope). Each morning on the planes of South Africa the gazelle awakes and knows that in order to survive he must be able to out-run the fastest lion. And each morning when the lion also awakes he knows that in order to survive he must out-run the fastest gazelle. You see it doesn’t matter whether you’re a gazelle or a lion when you wake up you had better start running.

Risky Loans

Federal regulators recently suggested new guidelines for banks that originate certain types of high-risk mortgages. The banks, predictably, were not enthusiastic about the regulators' suggestions. But the regulators have it right: It's high time for banks to limit access to these mortgages and disclose the real risks to borrowers.

The suggested guidelines would require banks to qualify borrowers for financing on the basis of fully indexed interest rates for interest-only and payment-option loans and to consider the borrower's ability to repay not only the original loan amount, but also any additional principal that may result if interest-only or minimum payments are made.

Banks have objected that these guidelines would limit the number of people who can qualify for these loans. That's true and it's exactly the point. The borrower's ability to repay the loan should be a basic component of loan underwriting and to ignore it defies common sense. A borrower's ability to manage no more than just the interest-only or minimum payments should disqualify him or her from this type of loan since the payments will escalate when the loan is recast. Reasonable guidelines will not keep everyone from obtaining these loans, but rather the loans will be reserved for those borrowers who have the ability to manage and repay the debt.
Banks also have suggested that borrowers may be frightened by disclosures that reveal how much higher their monthly payments would be in certain circumstances. Again, that's exactly the point: Borrowers who are frightened off by those higher payments shouldn't have these types of loans. Most home buyers naturally experience some anxiety about the financial commitment, but it's irresponsible to help people buy a home they are truly frightened they won't be able to afford.

Banks also have argued that the suggested disclosures should be required of all lenders, not just federally insured institutions. That's a good point too -- and a compelling argument for more regulation, not less. Once federal regulators set appropriate standards, state regulators can and should follow that lead. Some state-level regulatory groups already have signaled an intention to do so.

Interest-only and minimum-payment loans have helped many people purchase homes, but who benefits if those homeowners can't afford the higher payments and the property ends up in foreclosure? The homeowners lose while the lenders and mortgage brokers make out like proverbial bandits. The brokers have collected their commissions; the lenders have sold the loans, and the investors who purchased them are protected by mortgage insurance, which is, of course, paid for by the homeowners.

Interest-only and payment-option loans were supposed to be intended for sophisticated borrowers who could take advantage of the greater flexibility. The fact that so many of these loans were sold to people for whom they weren't intended begs an obvious yet important question: Why didn't regulators insist on tougher guidelines a long time ago?

It's equally easy to point an accusatory finger at supposedly greedy mortgage brokers, but neither the regulators nor the brokers are solely responsible. After all, the lenders created these loans and set up the compensation systems that rewardbrokers who push borrowers into these riskiest of mortgages.
It's fair to argue as well that some of the blame lies with the borrowers. Willful ignorance, irresponsible decisions, house envy, an insatiable desire for immediate gratification, blind trust and a sign-it-now-and-read-it-later-if-ever mentality have been magnified to an astounding degree and aren't a smart way to borrow hundreds of thousands of dollars.

Since those borrower frailties are apt to undo the benefits of additional disclosures, tighter underwriting guidelines are crucial. Those who are able to qualify will be able to obtain these loan products while those who can't, won't. It's really that simple, and the regulators, lenders, brokers and borrowers should make it happen. To mix a few metaphors, it's time for everyone to step up to the plate, be the first line of defense and get the responsibility ball rolling because it's the right thing to do.