"An appeaser is one who feeds a crocodile, hoping it will eat him last." -Winston Churchill
This is a quote that I believe sums up in a nutshell how many of the nation's lenders are handling their responsibilities in today's credit crisis. Thus, my blog this week is of the editorial nature, as I'm not especially happy with the way lenders are managing situations they may have created by making bad loans to begin with.
I've been reading numerous articles about the deepening mortgage crisis, and I am continually saddened by the stories of individuals, families, and even small home builders who have been swept away by the ever increasing wave of foreclosures. I read one article that likened an individual homeowner attempting to work with lenders to negotiate alternatives for refinancing or freezing their monthly mortgage payment to be like trying to"turn a big ship." That's when I came up with the idea of calling this big ship that is collectively the lender "The Mortgage Mountain." For a lot of hard working people, their monthly mortgage payment seems like an insurmountable mountain that many of them will never get to the top of. I think that lenders owe borrowers a rope and some hooks to help them climb the mountain, rather than being of the mindset that they got themselves into this mess and they should be able to climb it alone.
While it's certainly true that the government seems to be making a concerted effort to stem the tide of foreclosures by offering one-on-one assistance to borrowers that may be in various stages of default on their loans with programs like Hope Now, lenders ought to step in and offer to help borrowers- without being told that they have no choice. After all, the lenders were the ones making loans that they in many instances had no solid idea if the borrowers would or could re-pay. The defining criteria of loan approval for these loans was based solely on the lender's own profit margins and bottom lines, not an ability to re-pay them, as it should have been based upon. These government programs that have been set up to assist borrowers in trouble need to make lenders accountable if they are going to achieve what they were supposedly established to achieve.
There are no easy answers. That is for sure! Even if all of the current sub prime and exotic mortgages were reset to 30 year fixed rate loans at lower interest rates, undoubtedly many borrowers would still be in over their heads. Currently, much of the problem may be attributed more to declining market values than bad loans. What incentive do borrowers have to refinance and stay in their homes when they are upside down on their mortgage and owe more on the house than it's worth in today's market? Plenty it seems for many borrowers. Pride for one thing. Pride of ownership, pride that when you make a promise, you keep it. After all, that's the American way. We were taught that you don't walk away from your obligations. It's amazing how tenaciously many homeowners are struggling to hold onto their homes rather than to take the easy route and walk away from them.
Thankfully, homeowners can find many resources to aid in their battles to keep their homes. Online help is available, in many forms. See this website for an example of one way that grassroots organizations are taking shape to offer creative advice and possible solutions to stave off the tide of foreclosures. Lenders should be thrilled at homeowners who are fighting to keep their homes. They should jump right into the ring with the homeowner to do everything they can to try and make it manageable for the homeowner to refinance at a comfortable rate, so they can stay in their home. In the long run, helping borrowers instead of turning their backs on them has the potential to save the lenders a huge amount of money and headaches by having fewer properties to foreclose on. Fewer foreclosures also means possibly preventing a further erosion of home values. A sea of foreclosures has proven to do nothing for the real estate market but weaken buyer demand and cause a deeper erosion of property values.
A foreclosure can be a life changing experience for many people. Some liken it to a death or a divorce. Surely a financial catastrophe of this magnitude must feel like their world is crumbling to many people. We as real estate agents often times are caught in the middle. Right now in Tucson, many homeowners are attempting to sell their homes in what is called a "short sale." A short sale is when a homeowner who is behind on their mortgage tries to sell their house prior to it foreclosing. In a short sale, the lender agrees to accept less than what is owed on the loan to avoid the expense that it would cost the lender to foreclose on the property.
Short sales are difficult for Realtors because lenders are not very communicative or direct. They usually take much longer to close escrow than regular transactions, leaving the buyer of the house feeling like they were left hanging out to dry. There is one agent in my office who has been waiting to hear back from a lender of a property that a client is purchasing as a short sale for eight weeks. I find this almost impossible to comprehend in today's era of modern technology. Messages can be sent across the world in a matter of seconds. How can a financial entity be this inept at dealing with its accounts? I can only pose that as a rhetorical question for obvious reasons! In many instances, lenders will try to avoid compensating the real estate brokers for their participation in a sale (or else they will drastically reduce their compensation without cause or explanation), simply because they control the money. I know many agents who have worked extremely hard on these types of transactions, only to be burned by the lender in the end.
Additionally, lenders have been know to say they will agree to a short sale, and then once the transaction is complete, they file a deficiency judgement against the borrower in default in an attempt to recover the money they are owed. I have heard from inside sources that the only recourse a borrower has in an instance like this is to file personal bankruptcy. In January of 2009, many people who were either foreclosed on or sold their homes in short sales may be in for a rude awakening when they receive 1099's saying that they had miscellaneous income on the forgiven portion of the loan, and they may owe the IRS income taxes on the forgiven portion of the loan.
All in all, it's a difficult time for many homeowners. There are two silver linings right now for buyers. One is that home prices have dropped considerably, much of the decline being attributed to increased foreclosures and the ripple affect of them. In a few depressed areas of the nation, prices have fallen as much as 40%. Here in Tucson, prices have come down as much as 20% in some areas from their 2005-2006 peaks. Buyers can get a home for much less money, couple that with the second silver lining- the return of FHA financing. The real estate market won't be able to turn around until three things happen: 1) the market must absorb the existing inventory, 2) buyer demand must increase, and 3) lenders must find a way to help distressed homeowners and prospective borrowers. The government should find a way to make lenders accountable for being part of the solution. Otherwise, the government will become the proverbial appeasing alligator too.
Please feel free to call or e-mail me with your questions and/or concerns, and of course if you would like more information about the Tucson real estate market, or are thinking about buying or selling a Tucson property.
Written by Sarah Ley
BSBA, ABR, CRS, CNHSA
Tucson, AZ REALTOR with
Long Realty Company
Direct: (520) 404-0544
http://www.sarahley.longrealty.com/
sley@longrealty.com
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1 comment:
Its all about price. What is so hard to understand about that? The median wage in Tucson is less than $30K a year. What kind of house can the majority of people in Tucson afford with that wage?
The answer; Not many with todays prices. That is why the prices you see today will come down another 20%, at least, before we see anything that resembles a normal market. That is, if we still have banks to lend the money.
The problem is so intertwined with high finance on Wall St. that I really would hesitate to call a bottom until the problems in the Bond and Credit market are completely resolved. That could takes years as hedge funds and investment banks unwind literally hundreds of billions in mortgage backed securities that are virtually worthless as they are right now.
Realtors think Tucson is insulated from the problems we see in California, but the latest data proves Tucson is anything but insulated. A population of a million should have sales approaching 3 or 4 thousand a month on the MOW end. We have less than 25% of that and the TAR is cheer leading "stabilization". Get you head out TAR, nothing has stabilized.
Banks won't touch you unless you have at least 5% down and great credit. If you have spotty credit, it is significantly higher. First timers, generally, don't have more than $10K saved and their backend debt to income is ridiculous as the price of everything has gone up. They can't afford homes unless they are in the $150K range or they have a great job which are few and far between in Tucson.
The other people wanting homes have to sell their home first and that, as you know, is a nightmare right now. Retiree's have limited options as well.
Tucson is in for a rude awakening when they see the spring numbers as the dismal quagmire they are.
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