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Solutions to the Foreclosure Dilemma

Jan 22, 2008
The news is full of stories about the impending explosion of foreclosures when homeowners who have adjustable rate mortgages have their rates increased under the terms of the mortgages they voluntarily signed at purchase. Let's examine this phenomenon.

The country experienced the greatest real estate market for the number of sales in history from 2001 through 2005. The Fed lowered interest rates to levels of the 1960's in an effort to pull the country out of mild recession, and the financial shock of 9-11. The Bush tax cuts simultaneously pumped money into the economy when families were allowed to keep more of the money they earned. This combination established a recipe for growth. It succeeded, and the government now has more revenue flowing into D.C. than ever before in our history, only to be squandered by over spending.

During this period of growth money was cheap to obtain and consumers that had been priced out of the housing market could then afford to purchase a home. During this five year record spurt in home sales the buyer pool was made up of a majority of well qualified buyers. When demand started to become satisfied as a natural consequence of record numbers of buyers purchasing, the credit quality of the buyer pool was lowered. To keep the loan machine pumping out loans many lenders lowered qualification standards and made millions of loans to people that normally would not qualify. An untold number of people were made loans that should not have been buying a home. That is what is known as the sub prime market.

Investors recognized the opportunity the real estate market offered and hence "flippers" became a household word across America. As in all run up economic opportunities there were savvy investors, and novice investors. Think of the tech bubble in the stock market that burst. Do you think the late comer novices were the biggest losers or the savvy investors who were selling as they sensed the top was near? Same true in the flipper markets.

The negative effect of the investor infusion into the single family market was the artificial run up in prices. While savvy investors made millions running up prices, because they could with demand at an all time high, and mortgage money cheap for prospective buyers to afford their overpriced products, it was the working family that got caught in the trap. Prices had risen to such unrealistic levels that lenders then created loans such as 40 year mortgages, interest only mortgages, and adjustable rate mortgages with too good to be true beginning "teaser rates" for families to be able to qualify to purchase a home.

There should be more investigation into foreclosed properties. It is my contention that the majority of foreclosed properties currently on the market were vacant before foreclosure and no family was put on the street. Most of the properties were owned by builders of new homes, or novice investors caught holding the bag at the end of the pyramid scheme built by savvy investors. Builders know the risks of the market, novice investors learned the hard way.

The president has proposed that lenders can voluntarily freeze the interest rate on adjustable mortgages for up to five years, for families that are current on their payments, and will be unable to afford the payments following the agreed upon increases at time of closing. I would add one more stipulation, the freeze can only be eligible on owner occupied properties. Investors that took out these mortgages should not receive special consideration, and I feel sorry for homeowners who were foolish enough to buy a home before they sold their current home.

I would propose the following solution. I don't believe freezing the rates is a viable long term solution. What happens when the rate freeze expires? Think of what is going to happen when the Bush tax cuts expire in 2010. In my opinion the vast majority of homeowners that have an adjustable rate mortgage could afford a fixed rate loan with interest rates falling to a two and one half year low the past couple of weeks. Why don't these families simply refinance? Because the amount owed that would need to be refinanced is greater than what the home is worth, resulting in the loan being denied due to the short appraisal. Solution; waive the appraisal requirement on refinance for owner occupied homes with adjustable rate mortgages. That won't cost anyone a dime.

Personally I am against government intervention, however the reality is that this is a main stream media event due to the presidential election year. The media has their favorites they want to help win election. This past week was an example of politicians proposing bailouts for families in foreclosure, in an attempt to buy votes. The proposal? Raise taxes on upper income families and then redistribute that money to help families in foreclosure. I have a better idea. Instead of stealing money from responsible, productive citizens to be redistributed, try this; waive all federal taxes for families facing default if their loans will adjust to a level they cannot afford. These families would then be able to afford to pay for their homes instead of sending the difference making money they have earned to D.C. to be squandered on big government programs.

The result of the subprime collapse, when lenders foolishly lowered standards and made millions of loans to people who had no business buying a home, is being felt in the mortgage markets today with tougher lending standards rapidly falling into place. This will cause short term pain, however long term stability in the housing market.

The result of investors driving up prices that were unsustainable, making adjustable rate mortgages the working families only option for home ownership, is resulting in real hardship. If there is to be any intervention by the government into the foreclosure process, it should be limited to owner occupied homes, with adjustable rate mortgages, by waiving the appraisal requirement for refinancing. Period.

Families that were taken advantage of by predatory subprime lenders should receive their relief in court. That could be a challenge however, because the subprime lenders have disappeared. I feel empathy for these families however it should not be the taxpayers responsibility to pay for their decision to sign the loan papers at closing.

Government should not bail out any lender, or investor. They, of all people, should have understood the risks they were taking, and the taxpayers should not be punished for the risks taken by others.

The best way to avoid a foreclosure is for the homeowner to contact their lender as soon as they realize they will have difficulty making their payment. Lenders will work with these families. Lenders don't want to foreclose. Lenders are willing to help. The problem is too many families wait until it's too late for the lender to be able to help.

This entire situation could have been avoided if these troubled home owners would have had professional, ethical representation at the time of purchase from an agent that would have advised their clients to avoid the risks they were taking.

My advice, don't buy another home until your current home is sold. Don't finance your home with an adjustable rate mortgage, interest only mortgage, or 40 year mortgage. Don't buy a home with damaged credit, to avoid paying too high an interest rate. Don't buy an overpriced home. If you buy an overpriced home today, someday you'll have to sell an overpriced home. Millions are learning that lesson today. Don't invest in real estate with the expectation of making a quick buck. Interview and hire an experienced, ethical agent to advise you in your home purchase, or sale.

To do otherwise is risky, and the consequenses dire. We are witnessing that today.
About the Author
Fritz Pfister is a licensed Realtor with RE/MAX Professionals Springfield Illinois.
Fritz is a leader in the local real estate market and hosts a live one hour radio program, now in its' 13th year.
Fritz's website is
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