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California industry appointments update - 08/08/2006

National Mortgage Professional
Aug 07, 2006

Preventing defaultElisa Blackdefault, foreclosure Mortgage lenders are facing an increasing problem - defaults are on the rise. The housing boom and the proliferation of higher-risk home equity loans have meant increased business for lenders. That's good. But current economic conditions - high gas prices and energy costs, increasing consumer debt, high interest rates and company downsizing - have meant that homeowners are struggling to make mortgage payments. That's bad. Many economic forecasters are predicting that default rates will increase to 15 percent in 2006. Loan products, like the interest-only loan and various creative sub-prime loans, open doors for potential homeowners. But if the loan customers do not have a realistic understanding of their monthly homeowner expenses, those doors can be trap doors. In over one's head Many potential homebuyers equate their future monthly mortgage payments with their rent payments. They think that if they can afford $800 per month on rent, they can surely afford a similar amount per month toward their own homes. But potential buyers must also allow for taxes and property insurance, homeowner's insurance, property taxes, mortgage insurance, potentially higher utilities, maintenance, yard work, moving expenses, etc. Mortgage lenders and potential buyers alike should be aware of behavioral economics. Do attitude and behavior influence what kind of home one buys? You bet. Status seeking can be a significant factor in default. Normally rational and shrewd consumers can rapidly lose their senses of proportion when it comes to creating their castles. A recent Business Week article about the housing market stated that neuroscientists claimed to have located the part of the brain that motivates overspending. It's below the neocortex, which is often referred to as the primitive or "lizard brain." Warning home-loan customers about their lizard brains ought to go a long way in proving to them you really do have their welfare in mind. Prevention through education Doris Rusaw is the home-buying and mortgage counseling coordinator at Community Action Services in Provo, Utah. Doris said, "The best prevention of default is education." In 2001, Freddie Mac released a study, titled "A Little Knowledge Is a Good Thing: Empirical Evidence of Effectiveness of Pre-Purchase Homeownership Counseling." This study tracked nearly 40,000 mortgages from Freddie Mac's Affordable Gold program. Pre-purchase counseling was found to have a remarkable impact on default rates. Borrowers who received pre-purchase counseling were 19 percent less likely to fall 90 days behind on mortgage payments. Breaking down those numbers, borrowers who received individual counseling were 34 percent less likely to be 90 days delinquent, those who received classroom instruction were 26 percent less likely and those who took a home study course were 21 percent less likely. Marilyn Albertson is a family and consumer science agent for Utah State University Extension Services (USUES). When asked what the first thing was that she wanted potential homebuyers to consider, she answered, "How prepared are they financially? Have they got an emergency fund? Are they in the habit of saving, and can they create a spending plan, which includes monthly expenditures? Are they in the habit of paying on time?" If a potential homebuyer feels less than secure about his financial past, all is not lost. A good counselor can help a potential homebuyer develop responsible financial habits and even create a savings plan with a home purchase in mind. USUES has created PowerPay, a debt-reduction software program that helps users create a spending plan to pay down consumer debt and save for homes of their own. All across the country, the U.S. Department of Housing and Urban Development (HUD) sponsors pre-purchase counseling services. You can find one in your area by visiting the HUD Web site at Kaboom! Default happens. But counseling can forestall foreclosure. When a homeowner is on the brink of default, Rusaw sits down with the homeowner and searches his budget for places where he can cut. She also teaches him how to handle creditors, both in writing and on the phone. Doris helps he and his family evaluate whether or not their financial crisis is a long- or short-term one. Sometimes families can write a hardship letter or arrange to refinance the loan. FHA loans also have some provisions for helping families in tight situations. For example, missed payments due to injury from natural disasters and wildfires are considered special situations. Also, in specific circumstances, a homebuyer may qualify for one-time-only help from the FHA insurance fund. What was Doris' last piece of advice? "Sell, if you have to, in order to avoid default. Avoid it at all costs." Just as homeownership is a sign of a stable community and economy, default is sign of instability. Loan officers who urge their home-loan clients to get pre-purchase counseling or take homebuyer education classes are doing not just their clients a favor, but themselves and the community as well. Elisa Black is director of marketing and communications for the Esther Foundation, a Utah-based non-profit organization that works to strengthen communities by helping people to become homeowners. She can be reached at (866) 743-7795 or e-mail [email protected]
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