It’s impossible to stay away from the news that foreclosures are up, and way up.
If one listens to any broadcast news, if one reads any print or Internet news or websites, if one just drives around, the word FORECLOSURE looms large.
It’s very easy to assume that, when one has a steady job and pays one’s own bills, this foreclosure crisis won’t affect one’s personal world. It’s very easy, in that situation, to assume that those losing their homes to foreclosure are financially irresponsible, are too stupid to have properly read the contracts, or too greedy and bought way over their heads.
In reality, it will affect your world. I’m going to explain the foreclosure process, and why it will get far worse before it starts to get better, and how the increase in foreclosed properties affects everyone at the consumer level.
It all starts with missing a single house payment. “Missing” a payment means that you’ve not made the payment, and the new one is now due. Now, you owe two house payments.
So many reasons can presage the first payment going delinquent: medical bills, family holidays, car repairs, a brief job loss or change in job which delays payroll for two weeks, a DUI and the bail, attorney’s fees and court costs that go with it. As a practical matter, the large body of people in this country are two paychecks away from financial meltdown. When your largest monthly obligation is your home, it’s the one that feels like it will provide the greatest benefit by letting it go delinquent - meaning, that you have the most money to spread around by not making the house payment.
No one makes that decision thinking that they won’t be able to recover. Everyone thinks they can pull it together soon enough.
Of course, once someone is behind a payment, the next one comes running up in no time at all. Now, they’re two payments behind. They still think that they can catch up.
Then, they’re three payments behind.
The foreclosure process
Here in Texas, we have non-judicial foreclosure, which means that a lender doesn’t have to bring a lawsuit to foreclose, except for home equity loans. In many other states, a lender has to bring a lawsuit to foreclose and has to prove to a judge that there has been a default and that all of the rules have been followed.
In Texas, though, a lender has only to issue a notice of default and acceleration, and publicly post notice of their intent to foreclose on the first Tuesday of a given month, not fewer than twenty days from the date of posting.
Banking law and accounting rules motivate lenders to begin this activity after 90 days of non-payment. Usually, much more time passes before the foreclosure activity starts; of course, by failing to pursue default or workout, the lender can unwittingly create a situation where there is no easy solution other than foreclosure.
After the foreclosure sale
Once the foreclosure has occurred, the former owner becomes a squatter. In most states where the court has ordered the foreclosure auction, the Sheriff is sent out to evict the former homeowner. In Texas, and most other non-judicial states, a contractor is sent out by the winning foreclosure bidder (9 times out of 10 being the former lender) to request that the former owner vacate peacefully. If they don’t, then they are evicted - a process that takes only about two weeks.
The lender, having foregone collection of payments, probably having paid property taxes for the former owner, having paid attorney’s fees and court costs, now runs the post-foreclosure playbook.
The house, now sitting vacant, is offered for sale as is, meaning that any deferred maintenance or repairs are undone, and the house is offered at near a top market price and as a foreclosure. Yard work is minimal, and aside from sticking a sign in the yard, there is essentially no marketing done.
After a few months of unacceptable offers, the price is dropped to below market or the bottom of the market. This produces a sale, and sets the bar for neighborhood value at a new low.
Why this affects you
So, you’re good in your home, the payments are current, your job is secure, everything’s fine - why does this affect you? The common opinion held by someone in this position is that those who are suffering in the foreclosure mess are personally to blame, and that resources should not be deployed to help those people.
Here are the reasons why it does matter to you if your neighbors start losing their homes:
* Most people keep their homes only for five to seven years
* Divorce, job change, transfer or illness are the top motivating factors to sell
* Divorce, job change, transfer and illness are nearly always unplanned
* Most lenders now won’t loan in a neighborhood with more than 10% foreclosures
* Vacant, un-kept homes begin to affect neighborhood values
* These value changes create an environment where only cash buyers can buy
* Most buyers of foreclosed homes hold them for investment
* Investment owners rarely, if ever, update or improve a property
* Renters (those who occupy investment homes) NEVER update or improve property
* You could find yourself unable to sell at any price
A little history lesson
Twenty-five years ago, the price of oil was lower than the cost to extract it from the earth - which, given today’s prices, seems impossible. Houston experienced an “oil crash,” and thousands were laid off. We had a foreclosure crisis here, and whole sections of the city became investment property.
Those neighborhoods have only just come back to an inflation adjusted sales price that matches what they sold for newly twenty-five years ago. After twenty-five years of deferred maintenance and upkeep, most of those homes will NEVER be owner occupied again.
So, it really does matter
If your neighborhood starts a cascade of foreclosures, your value could be stripped away from you, never to return. The real estate bubble will take fifteen years to recover from in terms of any rapidly appreciating real estate values. The idea of a property gaining in value due to market conditions is likely over for most neighborhoods and most parts of the country. Only in those few neighborhoods where foreclosures aren’t rampant, and where demand exceeds supply will one see an increase in value. Even here in Houston, we have a buyer mindset that it’s a buyer’s market and that prices are too high - when they’re not too high at all.
I hear Realtors now reciting the mantra that it’s a buyer’s market. It only is if we say it is. Effective and different marketing will get properties sold, coupled with appropriate pricing.
The “assistance” so far offered by the government amounts only to tax breaks for large corporations. None of the “assistance” helps most homeowners facing foreclosure, because they’re voluntary on the part of the lenders.
By adjusting the tax code to make it more beneficial for a lender to work with a borrower, even with one that has already gone through foreclosure, this crisis could be stopped dead in its tracks. However, that is remote and unlikely, as only the Realtors have the lobbying muscle to make such a demand.
And Realtors aren’t generally willing to look to their future marketplace and make choices - they, like most people, deal strictly in the present day and hope that tomorrow will be better.