The Foreclosure Boomers Are Here!

Brandy King-Cutler
On Track USA™ financial, real estate, mortgage, home buying, credit education and support services to those that need assistance.
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By Brandy King-Cutler
Posted 4/21/14

It started with the crashing real estate values in 2006. Unprecedented numbers of people defaulting on their mortgages caught many in the mortgage industry (as well as local, state and federal …

It started with the crashing real estate values in 2006. Unprecedented numbers of people defaulting on their mortgages caught many in the mortgage industry (as well as local, state and federal governments) off guard. The data is difficult to consolidate into a number that everyone in the industry can agree on, but best estimates are that 10 million people have lost their homes to foreclosure or have been in the foreclosure process. That number does not include other default events such as short sales, deed-in-lieu of foreclosure and bankruptcy.

There are millions of people whose lives have been turned upside down, forced to walk away from their homes and possessions, finding housing in overpriced apartments, or seeking refuge with friends or relatives. Those affected are beleaguered, embarrassed and plagued by the long lasting effects of demolished credit and devastated self-worth.

The first round of consumers who have gone through this foreclosure bubble are beginning to immerge in the housing market and are asking questions that most industry professionals are unprepared to answer. Even with a history of a default event in their past and less than perfect credit weighing them down, they are gamely trying to overcome these challenges and once again realize the “American Dream” of home ownership. This is catching the mortgage industry and the government off-guard and ill-equipped to serve the millions of people making their way back into the housing market.       

When a consumer finally gets the courage to raise a hand and ask for help, most lenders and real estate agents lack the relevant knowledge of what options are available and consequently turn them away. Some of the more persistent potential buyers come back and ask for help, but many labor under the incorrect assumption that they must wait seven years from the default event before they can even attempt to purchase another home. This is unfortunately substantiated by what they often read and hear. For example, a recent article in the Sun Sentinel reports that a buyer with a foreclosure must wait seven years before qualifying for a Fannie or Freddie backed mortgage, (Fannie and Freddie are the largest purchasers of mortgages and run by the Federal Government). It is true it takes seven years for a foreclosure to drop off your credit report, however, Fannie and Freddie guidelines state that a borrower may be eligible for a loan as soon as two to four years from the default event, including foreclosure.

 “Sometimes I think that this could very easily be me sitting here on the wrong side of the table.” Kim Pitaniello, Remax Alliance on speaking to borrowers in foreclosure.

Changing Perceptions

Consumers realize that their past financial history is not serving them well, and are highly motivated to change. Changing the industry professionals may present more of a challenge. Research shows that people in groups hold tightly to opinions, attitudes and beliefs (OABs), and are not easily changed.  Affiliations with the real estate and mortgage associations often creates strong influences among its members through political and educational agendas.   These affiliations further perpetuate the OABs of the group. Interviews with real estate and mortgage professionals revealed several of these OABs exists with the prevailing ones being “once a person has bad credit they will always have bad credit” and “these people that went through a foreclosure or a bankruptcy shouldn’t have had a mortgage in the first place.” Also common are attitudes that credit scores are indications of a person’s integrity and that, even if you repair a person’s credit, it will just go back down again. These perceptions may have held some truth when the economy was good but it is not the case today.

Real estate agents that have been managing and selling bank owned properties (REOs) know first-hand that people from every income level and home price have been touched by the default crisis.

Marcel Savoie, a Realtor with Brokers Guild of Littleton, CO, dealt with hundreds of these borrowers over the years. He says “Many individuals, even professionals in the home industry have taken the position it was the fault of the borrowers obtaining risky loans and not the downturn of the economy. Not all loans were bad. Many individuals defaulted due to layoffs, wage reductions, and/or illnesses.  A lot of very financially conservative people got swept up in the turbulence of the economic downturn and they tried everything they could not to lose their home to a foreclosure.”

This sentiment is echoed by Kim Pitaniello of Remax Alliance in Greenwood Village, CO, “I’ve had to knock on doors of people in $70,000 condominiums all the way up to 2.5 million dollar homes in prestigious neighborhoods. Every economic group got caught in this. I sit down with these people at their kitchen table and it’s been heart breaking to hear what’s happened to them. Sometimes I think that this could very easily be me sitting here on the wrong side of the table.”

 Let’s Turn Our Attention to Borrower Rehab

While the foreclosure statistics are reportedly declining in recent months, displaced homeowners are finding it difficult to find a place to live. Unable to qualify to buy a home due to the negative impact of a foreclosure on their credit, and a shortage of single family residential rentals, many families are being forced into apartment living. The good news for the apartment rental owners, business is booming. Vacancies are down and rent prices are up.  According to a report in the Washington Post in 2009, about 26 percent of renters - or 10.1 million people - spent more than half their pre-tax household income on rent and utilities. The bad news for the consumer; rent is more expensive than a family would pay for a mortgage.

Plenty of attention has been given to the cause and solutions of the mortgage industry crisis. There has been sweeping reform across the industry starting with Congress passing the Housing and Economic Recovery Act of 2008, followed by the creation of the Consumer Financial Protection Bureau (CFBP). In February 2012, the Attorney General of the United States, 48 states and the District of Columbia, including Colorado, reached a $25 billion settlement with five of the largest mortgage servicing companies. We have sanctioned and punished, provided financial bailouts and support to the big corporations that were at the helm of the mortgage crisis. Why then do we still insist that the borrowers caught up in all of this are at fault and why are we not doing more for the affected homeowners? Perhaps it’s going to take another crisis to get the right attention on the issue, or, we are eventually going to respond to the ever growing consumer demand.

Consumer Demand –Baby Boomers, Depression Cohorts and Now Foreclosure Boomers! 

Educators studying adult learners know that to motivate adults to learn something new, they need to know “what’s in it for me to learn and change.” Marketers

often use segmentation in advertising in order to target a specific audience. Since the target audience is a group of entrepreneurs and capitalists at heart, appealing to their need to grow business will provide ample motivation for change. A cohort group is highly influenced by external events as in the so called “Baby Boomers”. Born in 1946 – 1964, this generational cohort received and still receives a large amount of attention from marketing professionals because as a group, they impact consumer spending.

A correlation can be drawn between the Depression Cohorts and the impacted consumer in the current recession. Although it is still too early to effectively measure the numbers of people that have been affected by the mortgage crisis, early estimates are that millions have been involved in some kind of default event, perhaps making this cohort larger than the depression cohorts. In the article entitled How Many People Have Lost Their Homes? US Home Foreclosures are Comparable to the Great Depression, the author Washington cites several sources for foreclosure numbers  showing how difficult it is to keep track of numbers and there is no one source of data. It is believed that the numbers are much higher than are being reported. Washington goes on to compare the foreclosure starts to the Great Depression.

Responding to the Need

In addition to changing the OABs of service providers, mortgage professionals need to be aware of new and evolving programs that may not be completely vetted but are becoming available to consumers. For example, the Federal Housing Authority (FHA) loan program launched a “Back to Work Program” designed to shorten the time frame from three years to one year for a borrower with a foreclosure if the borrower can prove that the foreclosure was due to a 20% decrease in income. This is a good start but lenders are shying away from using this program because there are many unanswered underwriting questions and it is too difficult and time consuming to be the trailblazer utilizing this program. Typically sales production people (real estate agents and mortgage originators) do not have the luxury of waiting months to vet out a new program. Fannie and Freddie have yet to respond to the need and are holding on to the 3-4 year post default event forgiveness plan. Federal and state governments have spent plenty of time and money trying to save borrowers from default, and even more effort has been spent in industry regulations to as preventative measures. It’s just a matter of time before the attention is turned to the housing problems and lack luster real estate sales across the country.

As for the borrowers that have been through foreclosure, bankruptcy or have less than perfect credit, it’s time to look forward to create a program for Borrower Rehabilitation (Borrower Rehab). Education programs and sound lending practices to give people a chance for responsible home ownership is where we need to focus our attention and rather quickly.

The Depression Cohort, born between 1912 and 1921 were found to have been influenced by the economy. There were approximately 13 million (7% of the population) of this cohort and marketing research shows that behaviors were strongly influenced by the depression; financial security ruled their thinking. Experiences in external events influence buying behaviors and in their article Defining Moments: Segmenting by Cohorts, (Schewe 2000) the authors write a cohort marketing example:

One savings and loan bank on the West Coast took a cohort perspective to boost deposits from this cohort. They used an icon familiar to this age group, George Feneman (Groucho Marx’s television sidekick on You Bet Your Life), who assured this cohort of the safety of their money.

A correlation can be drawn between the Depression Cohorts and the impacted consumer in the current recession.

Brandy King-Cutler has served as both Director and Vice President of foreclosure, bankruptcy, and REO departments at several national mortgage servicing institutions. She is currently working as a Mortgage Originator for American Pacific Mortgage of Colorado/Universal Lending. She is also one of the founders of On Track USA™. On Track USA is one of the country’s leaders in taking the concept of financial education to create the Borrower Rehab concept, working with borrowers to rehabilitate and empower them with the knowledge needed to secure their financial future and recapture their dream of homeownership. To learn more go to www.ontrackusa.org.