In Grand Rapids, the rates of foreclosures have increased dramatically over the past year. Kent County is averaging about 100 foreclosures a week right now. The crisis is a result of a number of factors including lay-offs in the furniture and auto industry over the past several years as well as more buyers opting for adjustable rate mortgages which are adjusting upwards and increasing payment levels significantly.
As a real estate agent, I have negotiated foreclosure and pre-foreclosure sales for my clients. Each part of this process is gut-wrenching and often laden with anxiety and guilt. The fact is that unwanted, disruptive events can come suddenly into anyone's life; illness, a bad financial decision or investment, job loss, business failure, death or divorce can plunge anyone of us into a situational crisis that is unexpected. But, there are some disturbing patterns that are evident amidst all this chaos.
The Mask:
Traditionally, a mask is worn to cover and conceal one's true identity or activity. Perpetuators of crime hide behind it's anonymity to shield themselves from prosecution. The crisis in foreclosures in West Michigan is mask which veils a broader dimension of involvement beyond those whose homes are being forfeited. Perhaps, the nature of the injury could be succinctly stated as creating inventive methods and means to over-extend financing to individuals in a manner that puts them at severe risk for default.
Lending models are extremely accurate in their predictive ability to determine default rates. Adjustable rate mortgages have historically been viewed by the lending industry as a high risk alternative. But in the last couple of years adjustable rate mortgages and interest only loans have skyrocketed with double digit increases. The temptation to be over-extended/leveraged on debt has knocked on our door in different forms. Sometimes it has arrived as a letter, a call or fax describing an incredible "teaser" rate for a few months or years. In other instances, the delivery was via loan officers willing to finance anyone or anything for a fee. We have been regaled by TV commercials starring incredible testimonials of individuals who got out of a debt crisis by creating more debt!
Many segments of the industry and society have been co-conspirators; appraisers created inflated values to buttress shaky real estate transactions. Sometimes the misdeed was the action of a homeowner in concert with a buyer who created fake documents to substantiate a false transaction or an investor allegedly "flipping a property". But, the point is that somebody designed the letter, somebody made the call or TV commercial; the appraiser, loan officer, Realtor, homeowner & buyer where not nameless or faceless. Who is the somebody? The somebody is us. Everyone who chose to turn a blind eye or to participate, everyone who knew the truth and ignored it, everyone who was consumed with greed or who was just plain ignorant.
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All of us have worn the mask. The crisis in the real estate industry is not unrelated to our collective choice as a society to be irresponsible in our spending habits and personal decisions. In fact, we no longer refer to ourselves as humans, we are now called CONSUMERS, a term which may reflect some unconscious desire to divorce ourselves from the implications of our decisions. The consequences have now returned home to roost...literally as all of us are being confronted by the prospect of potentially thousands of homes placed on the market because of a foreclosure proceeding.
The good thing about a mask is you don't have to wear it, it can be removed. An African proverb says: At anytime that you choose to wake up, it becomes morning for you. We can each choose to wake up and take individual responsibility and control for our financial lives. We can remove the mask and take a critical look at our personal spending habits. We can choose to walk away from transactions which are not financially wise or prudent. We can choose to say NO to acquiring additional credit and increasing our debt load.
The crisis has spurned some positive results. Housing affordability has never been better. Last year, ABC News featured Grand Rapids as one of the most affordable places to live in America! In the past 12 months, I have witnessed an urgent call to education amongst real estate professionals and mortgage lenders. There is more widespread understanding of what constitutes illegal activity and this light makes it more difficult for darkness to hide misdeeds. There are obviously many more lessons to be learned, and all of us will be learning them.
*For a List of Free Foreclosures in Grand Rapids, MI & Nationwide...
*Special note: The FBI recently offered classes to real estate agents, brokers and mortgage lenders in Grand Rapids, Michigan to educate the industry about the disastrous consequences of lending & real estate practice which constituted the practice of fraud . Most agents have never had this type of information presented so starkly and clearly. As a result of these classes and other situations, the Grand Rapids Association of Realtors has established a FRAUD HOTLINE available to the public to report suspicious activity and has beefed up its Professional Standards recommendations to ensure better education and enforcement of the transactions done by its members.
Lola Audu, is the Designated Broker & Owner of Audu Real Estate. Our company specializes in helping people buy and sell homes in the greater Grand Rapids, West Michigan area. We've had the privilege of helping hundreds of clients succeed in their goals of purchasing and selling property including demonstrated success in the negotiation of Short Sale Transactions. You can contact us via e-mail @ info@auduhomes.com or by phone at 616-791-0511.
Thank you for a well written article. As a REALTOR who deals mostly with people on the investment side of real estate I am constantly bombarded with different forms of fraud. And sometimes people don't even know that what they are doing is fraud!
Real estate agents, lenders, and YES! buyers and sellers are all responsible for this crisis. And if nothing else it is a crisis of ethics.
Chris Lengquist
http://kansascityrealestateblog.blogspot.com
Lola,
Thanks for the post. This issue of fraud is enormous and there are people at every turn seeking to commit criminal acts. Just today I got one of those emails from Egypt about someone wanting to pay me $1000 to report on the status of his commercial camp. It never ends!
Great and Literate post...
In Rhode Island and Massachusetts we also see increased foreclosure levels... very high, but I cant place my fingers on the statistics right now.
Combinations of refinancing, cash out, and purchases over the last year and a half... 100% financing. All with ARMs.
Sad but true.
Again, great post.
Thanks for the visit Chris. I appreciate your comments especially from an investors' standpoint. As I wrote, it occurred to me that we have all played a part in this process and to correct the situation, we must all step up to the plate and do our part in correcting it on an individual and corporate level.
Lola Audu
Hi William,
I'm surprised that the e-mail came from Egypt, I had heard of all sorts of scams from some other countries, but that's the first time I've heard of Egypt. Just proves how ubiquitous this thing is. In the real estate industry so few of the agents understand anything about how value is determined and money is made in the financial markets, that ignorance plays a huge role in the perpetuation of fraud.
Lola Audu
Thanks for visiting Paul, that's interesting to read your comments about your area in Rhode Island and Massachusetts. In Michigan, much of this has been fueled by another financial crisis in our automobile, manufacturing and furniture industry. So many jobs were lost so quickly that the state could not readily absorb the workers who quickly flooded the job market particularly in professional types of jobs such as engineering, management etc.
A silver line has been the fact that at least in West Michigan, we had a fairly conservative home equity growth rate that averaged between 4%-7% overall on the average for much of the last decade. It's been very tough, but because most houses did not appreciate at astronomical levels, there was less to "play with recklessly", ..... But, still we're dealing with some difficult problems and I've heard some amazing stories from our title company escrow agents.
Lola Audu
Hi Maureen & Dmitry,
Thanks for the visit. The seminars have been conducted several times in our area. I know that they have been attended by agents from other cities in Michigan as well. They were first brought to my attention by my previous broker and they were being sponsored by one of our local title companies. I attended a packed session early last year, and the last one I heard about was held in a local cinema! If I hear of any more in our area, I'll forward the information to your attention.
Lola Audu
Lola - good job. It's a problem we are hearing about all over. I wrote a post recently about the dramatic increase in foreclosures in the San Diego area. Some really good suggestions - this should be read by buyers thinking about first or new purchases. I expect more short sales and foreclosures for some time.
Jeff
LOLA -
Very well written piece on how society must live with the consequences our actions have created.
Collectively we have created devasting consequences for some and uncertainty for many others.
Much like global warming the latency period between cause and effect may take time to play out.
As a new Michigan resident I hope that local industry participants can work to help reduce the risk.
A few comments:
1- The foreclosure rate has increased dramatically but it decreased dramatically over the past 3-5 years. We are WELL below the average for the past 30 years and FAR away from crisis mode.
2- Loan fraud, while on the increase, is still dramatically below where it was in the 1980's.
3- Lending models are extremely accurate in their predictive ability to determine default rates Extremely so, in fact, they've gotten more precise with the ability to securitize.
4- Adjustable rate mortgages have historically been viewed by the lending industry as a high risk alternative. That is just a false statement. I have worked in lending for 13 years and the MBS markets for six years prior to that. ARMS have always been considered the preferred vehicle for both lender and borrower. They are cheaper to the borrower in the long term but hedge the interest rate risk on a loan portfolio. Your statement is 180 degrees from the truth.
Folks, fraud, foreclosures, and ARMs have always been around. Don't be scared of the boogeyman. Prices rose and hid some of these problems these past 3-5 years. The old-timers will remember this period like 1998 or 1988. Awareness, okay. Blame assessment...come on!
I agree with Brian Brady.... we are both stats people. It only makes headlines more now, because more people are paying attention. It's been bad for ages. And he is right on with number 4. The only reason why arms got a very bad knock was because there were no caps back in the late 80's....'
But some good points were made....nice job.
I don't have stacks of statistics to fall back on, so you're just getting my opinion here...
I live and sell REO in the Ozarks, where historically, changes are behind most of the rest of the country. Yet I am seeing a large increase in Trustee sales in the 7 counties I cover. From 4-5 new ones every month in 2003 (when I started in real estate) to that many or more every week! When researching these at the courthouse, I see a large percentage of them were ARMs whose rates have adjusted and now the payments are considerably higher. In an area where the income barely rises for most workers, those rising rates are disastruous. No, ARMs are not the main reason for a rise in foreclosures, but they are a factor in a lot that I have personally seen. Cash-out refis with inflated appraisal values are a huge problem around here, as are Realtors who know which appraisers will "bring-in the numbers" and not kill a deal for them.... All of us in the real estate industry, whether agent, lender or appraiser, bear some of the responsibilty here, but so do the consumers who don't get educated, don't weigh their options or shop around for the best loans, or don't buy within their means.
A lot is changing in our economy, and default rates are just a fraction of the whole, but a fraction that, where I am, anyway, is increasing to very unacceptable levels.
Great prespective - thanks for the insigtt and you are right about fraud - it is evil
Now Have a Blessed Day,
John Occh, Hemet CA REALTOR
http://www.johnocchi.com/
No, ARMs are not the main reason for a rise in foreclosures, but they are a factor in a lot that I have personally seen
I'll bet it had more to do with "stated income" rather than the ARM
Cash-out refis with inflated appraisal values are a huge problem around here,
Just have the customer pay back the money they took out and you won't have the problem. I know I'm oversimplifying it but playing the blame game on a lender because of a direct mail piece or on a Realtor because they found a way to appease a buyer is searching for a boogeyman. The blame game can and should be placed on the consumer for (a) breaking the law, (b) buying ATVs and boats with the equity in their home, and (c) living like an NBA player on a trucker's salary.
I'm making the argument for personal responsibility. Someone has to.
Hi Jeff,
Thanks for visiting. I read your article about the market in San Diego. I would agree that this is a very "eneven" and complex situational crisis. In our community, some areas have experienced moderate price increases due to an emerging medical community in downtown Grand Rapids and some outlying communities which had pheomenal growth have cooled. I have found buyers to be increasingly cautious about making offers.
Lola Audu
Welcome to Michigan Brian! We've lived in West Michigan for over 20 years. We've met a lot of wonderful people and the community has been an excellent place to raise a family. Sure, the last several years have been tough economically for many people, but I have also seen people draw together and support each other in inspiring ways. Thanks for visiting & best wishes.
Lola Audu
Hi Brian (Brady),
Thanks for the visit. I appreciate your thoughts, but I would respectfully disagree with some of your conclusions. It was not my intention to place blame, but rather to encourage all of us to take personal responsibility for any part that we may have played in the foreclosure crisis. I think that there is enough blame to flame the world several times over, but sadly not enough thoughtful, insightful analysis to bring about resolution and create integerous solutions.
My post was also the result of actual experience with many buyers and homeowners in my area who have ARM mortgages that have recently adjusted or will be adjusting soon and are now trying to figure out how to make substantially higher mortgage payments in a job market that has been pretty tight. I would agree with you, that the decision was theirs to make and true, some are in the bind they are because they used the money frivilously.
But, I have been at the closing table and also seen totally different rates and adjustment periods than were stated in the GFI and have stopped closings until we could get clarification. I know that there has been in my experience some blatant Mis-representation about the rates and terms of adjustment on ARM based loans.
USA Today had an article published in 2006 entitle "Some Homeowners Struggle to Keep Up with Adjustable Rate Mortgages".
I do defer to your comments regarding the 1980's. I was still in highschool, so the state of the world and monetary policy and economics was not on my mind. :)
Lola Audu
Hi Amber, Thanks for your insights about what is happening in the Ozarks. Appreciate your comments.
John, Thanks for the visit and the blessing....may it be yours as well!
Caron, hello fellow Michigander! If I am aware of any more of these classes scheduled for the Grand Rapids area, I'll send you an e-mail as Flint is not too far & it may be posssible to attend. A local title company sponsored the one I went to.
Blessings,
Lola Audu
Hi Jeff & Brian (Brady),
Truly appreciate hearing from people in the lending industry. Understandably, the fact that there were not caps on earlier ARM's had the potential to create serious financial consequences for borrowers, but what I am referring to are ARM's being used increasingly as a vehicle for Marginal buyers who can barely qualify without them. Would you not agree that this change in underwriting standards may have had an adverse impact on default rates?
(With reference to Pt #1) I respect statistical research and would appreciate knowing the source of the info. about the decrease in foreclosure rates as the number of foreclosures has dramatically increased in our market. Our local Real Estate Board has recently appointed a Special Task Force Committee (2007) to make recommendations about how to deal with the crisis and educate our members.
Lola Audu
but what I am referring to is ARM being used increasingly as a vehicle for Marginal buyers
I wish you said that the first time. We are agreed with respect to the use of ANY loan product for renters who should not have bought a home. However, those folks are often qualified at the fully-indexed rate of a rate of the start rate plus 1%.
A RM products are much less risky to a consumer than a fixed rate. They are less costly over a five year period. Realtors should ask for explanations of an ARM including margin, adjustment periods, and a payment forecast. Realtors have a fiduciary responsibility to a buyer; lenders do not. We are simply purveyors of debt.
Lola,
Are you originating loans for consumers as well as practicing real estate?
Hi Brian,
No, I'm not presently originating loans as well as practising real estate...just not enough hours in the day. I do agree that a Realtor' fuduciary duty includes asking questions and being informed. But, I'm not sure I understood the first comment about fuduciary obligations of Lenders vs. Realtors. What obligation, if any, does a lender have to protect and/or serve the consumer's interest? I'm always open to learning...
Lola Audu, CRS GRI
Lenders have absolutely no fiduciary capacity to a borrower, legally.
Now, that might not be a popular response but it is the truth. Unless a borrower commits to using a mortgage broker on an exclusive basis, through an exclusive contract, a fiduciary relationship can not be established. In California, such contracts are illegal (as in Arizona). I believe Florida is the only state that grants the consumer and the broker that protection.
The Buyer's Agent is the only fiduciary. Lender's subordinate any interests to that relationship.
Is it bad business to rip borrowers off? Of course. Is it bad business to fund loans that have no chance in hell of being repaid? Of course.
Legally, there is no requirement for a lender to serve the interests of anyone else but his employer. The lending guidelines are set to protect the lender. Regulatory laws are set to protect the consumer. You can change the laws to protect the consumer but then 94% of the good borrowers would suffer.
Lola, since you pointed me this way, I read your post and all the comments. Brian Brady is a CFL lender here in San Diego. He has admitted that he was unaware (until very recently) of a real estate licensees obligations to the borrower when acts as a loan broker.
Everything he says is true in California for him. Not true for me because I am a real estate broker.
I would like to reach an agreement with Brian on what the industry should look like.
Thanks for sending me here.
Bill Roberts