Why are people losing their homes and their slice of the American dream? Mortgage brokers, real estate agents, banks, appraisers, the federal government, and the borrowers themselves all share blame. While these people were getting rich, people who never thought they'd be able to own their own home were getting places of their own. Amid these groups are honest business people who said "No" but are still being tarnished by a few. They and the taxpayers are now being asked to foot the bill.
According to the Erie County Sheriff's Department, there have been 328 foreclosures through the first 273 days of the year. More than one house was lost for every day of the year so far. Compare that to 58 total foreclosures for all of 1997 and one can see why we should be concerned. The most foreclosures in a year since 1991 occurred in 2005 when Erie County had 337 foreclosures. We're probably going to break that dubious record this year and experts are predicting 2008 to be even worse.
Mortgage brokers and banks made loans which should not have been made. For the most part, the problem loans came through the subprime market. Subprime loans are loans made to people with bad credit. They made large commissions and charged large, bogus fees to pad that commission. During the big refinance boom, there really wasn't much work involved. A person just had to set up an office and wait for the phone to ring. They refinanced homes and took the costs out of equity rather than show a bill to the unsuspecting borrower, so it became "free money."
But loan officers didn't explain many of these loans were adjustable rate loans which would increase the payments in a year or two to something the borrower could never afford. They didn't explain the fees, simply assuring their customers that the payment was lower -- sometimes because these lenders did not include taxes and homeowners insurance in the payment -- so the borrower got quite a shock on the property tax bill.
Real estate agents get paid on commission, too, so they were happy to sell houses to people who were qualified at a bank. In fact, they came to realize if an ethical bank said "no," they could just send their buyer down the road to the next lender. They say their job isn't to make sure the buyer can actually afford the house, their job is to sell. And that's true. However, they also got calls from lenders asking them to increase sales prices on contracts to cover closing costs. These houses cannot be sold because owners owe more than what the house is worth.
All the costs and excessive lending was made possible by appraisers who came up with home values that weren't logical. These appraisers promised, and delivered, any value for a home that was needed. Even just five years ago, a seller usually got money from equity to put down on a new house. These days, if they aren't losing their houses to foreclosure, they have to come up with thousands of dollars to be able to sell their houses and get out from under mortgages higher than their home's value. Today, foreclosures are having a negative effect on property values and a house isn't worth what it was two years ago, adding to the problem.
Lenders didn't scrutinize the appraisals. Instead, subprime lenders paid commissions for every loan approved. The people who approved more loans got paid more. The banks created stated income loans which don't require documentation of employment, so unethical loan officers made sure the borrower made enough money to cover the mortgage payments. It would be silly to assume these figures weren't fabricated in some cases. Today, these are being phased out, but the damage has been done.
The government encouraged this mess by allowing everyone -- no matter what the credit history -- to own a home. It allowed brokers and banks to charge huge closing fees and prepayment penalties without down payments for the least financially sound members of society. For years, FHA provided low-down payment loans to people with shaky credit, but FHA has strict requirements for lenders, brokers, and appraisers and requires a down payment. The subprime mortgage market had none of these controls.
The last hand in the cookie jar belongs to the borrowers themselves. It is difficult to feel sorry for someone who refinanced to pay off credit cards and now can't afford to make payments because they've maxed out those credit cards again. Many of these borrowers bought a house with no investment of their own.
They found the lender who would say "yes" after ten lenders had already said "no." They agreed to make payments they had no reasonable hope of paying. They took the cash and used it.
Who should be responsible for bailing out the foreclosures? Should it be the person who didn't borrow more than their house was worth or who saved to buy a house -- or should it be the person who took the money and benefited? Should it be the taxpayers or the so-called professionals who got rich off society's least financially astute?
Some foreclosures would happen no matter what, things happen; and, I sympathize with them. However, hardworking taxpayers shouldn't foot the bill for cookies they didn't eat.
JoAnn Cummings-Cook is Senior mortgage loan processor at Cummings Mortgage Service Inc., Sandusky, and a member, Leadership Erie County Class of 2008