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 www.hud.gov.
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].
