The Foreclosure Multiplier Effect

One underappreciated and underreported aspect of the various financial disasters that have unfolded over the past year or so are the indirect costs and far-reaching knock-on effects.

That was the case with the meltdown in the mortgage finance sector, which so many ignorant analysts, pundits, and policymakers mischaracterized as an isolated problem in a small corner of a large market -- one that would no doubt remain "contained," or so they said.

In fact, the losses in that segment of the lending universe were the catalyst for rivers of red ink in a mind-boggling array of financial instruments, an abrupt drying-up of liquidity in numerous global credit markets, an across-the-board increase in credit spreads, and an ongoing shift in favor of tighter lending standards, among other things.

In "Report: Foreclosures Can Ravage Entire Neighborhoods," the Palm Beach Post details a similar cascade stemming from one unfortunate side effect of a bursting housing bubble.

Foreclosures can ravage an entire neighborhood, not just the unlucky homeowner facing the loss of his home.

That's the conclusion of a new report from the Association of Community Organizations for Reform Now, a New Orleans-based group that goes by the acronym ACORN. The group researches low- and middle-income economic issues and pushes for affordable housing.

Losing ground

A total of 136 Palm Beach County homeowners who took out subprime loans last year will lose their homes to foreclosure when their rates reset, according to a study by the Association of Community Organizations for Reform Now. The cost to all stakeholders will be more than $160 million:

• Individual homeowners in foreclosure: $978,804
• Lenders and investors: $149,486,268
• Local government: $2,613,815
• Neighbors' lowered home values: $7,008,237
• TOTAL: $160,087,124

Source: ACORN

In Palm Beach County, 136 homeowners with subprime loans made in 2006 are headed for foreclosure when the loans reset, starting this year, according to the ACORN study.

"Homeowners, lenders and neighborhoods alike lose when foreclosures occur," the report says.

ACORN researchers made what they say is a conservative estimate of the loss of wealth various stakeholders face. In addition to the homeowner in foreclosure, stakeholders include lenders and investors, local government and neighbors whose home values decline.

The total cost of the foreclosures, which began this fall when the 2006 vintage of mortgages began to reset, is staggering: $160 million.

Surprisingly, individual homeowners in foreclosure account for the least of that $160 million: less than $1 million.

"Foreclosures take a toll on neighborhoods and other homeowners, not just those who have trouble keeping pace with their mortgages," the study says.

The tsunami of foreclosures sweeping through the towns and cities of Palm Beach County - once one of the hottest real estate markets in the nation - is partly because of greedy lenders, according to ACORN. Questionable lending practices - such as "low doc" and "no doc" loans, teaser rates, interest-only loans and option adjustable rate mortgages - pushed home buyers into loans they could not afford when they reset to higher rates, which often doubled payments overnight.

"Many urban and minority communities are suffering a tremendous loss of wealth due to foreclosures," said Maude Hurd, ACORN's national president. "Lenders and investors must modify exploding adjustable rate mortgages into affordable fixed-rate loans to prevent neighborhoods from being ruined by foreclosures and their consequences."

Those consequences include a disturbing increase in violent crime, studies have shown. An increase in the foreclosure rate to 3 foreclosures for every 100 owner-occupied properties in one year corresponds to an increase in neighborhood violent crime of about 7 percent, one study last year showed.

A Chicago study in 1997 and 1998 found that the foreclosure of one single-family home depressed property values within one city block by an average of 0.9 percent. In low- and moderate-income neighborhoods, a single foreclosure causes property values to decline even more - by an average of 1.4 percent, according to the Chicago study.

Falling property values cost local governments revenue.

A 2005 study by the Homeownership Preservation Foundation estimated that each foreclosure generates between $430 and $19,227 in direct costs to cities for such things as increased police work to combat increased crime and increased code enforcement.

ACORN wants lenders and loan servicers to modify unaffordable ARMs into a fixed-rate loan that Palm Beach County's homeowners can afford, based on their capacity to repay.

An earlier ACORN study found that in general, subprime borrowers - those with poor credit or no credit - were offered only adjustable-rate loans. Many of them didn't find out until closing that their mortgage payments could double when the loan reset.

A groundbreaking study for the Palm Beach County Housing Leadership Council showed that the difference between what homes cost and what workers could afford was more than $200,000.

Another study, this one by Global Insight, said that Palm Beach County's market fundamentals supported a median home price of $216,500. In September, the median price of a single-family home in the county was $355,300, according to the Florida Association of Realtors.

ACORN used a sample of 363 lenders owned by the largest lenders in the nation. They represented nearly 70 percent of all residential mortgages originated in 2006 and 50 percent of the subprime market. The government requires lenders to report race, gender and census tract, and to indicate whether the loan is high-cost, or subprime.

Comments

[Unscripted Thoughts]

While I am no fan of the irresponsible manner in which many 'homeowners' knowingly exceeded their repayment abilities, I think nudging the lenders to extend the initial ARM reset (or convert the loan to a fixed rate at the current rate) would be just enough of a sharp stick in the eye for the financial sector to teach them a lesson (that they already knew but greed does strange things to the mind.) For example, extending the reset point for 24-36 months would cause the banks some pain but should not cause outright failures (at least not immediately). It also gives people time to adjust and might (one can hope!) allow the turmoil to cool down somewhat to allow a more orderly correction and/or liquidation.

(excerpt) "The total cost of the foreclosures, which began this fall when the 2006 vintage of mortgages began to reset, is staggering: $160 million."

No. Most of that $160M was never there to begin with. It was just an illusion on paper.

[RM]

Unscripted Thoughts,
There is no question that some mortgage applicants were enticed to take out riskier loans.

However, I disagree with your proposed solution:
"For example, extending the reset point for 24-36 months would cause the banks some pain but should not cause outright failures"

This would be incredibly dangerous to the financial markets. The secondary markets for repackaged mortgages are already essentially frozen, and this would certainly make things much worse. Bank failures would be certain, and if a bank fails, they must liquidate their assets by selling them. This would send financial markets into panic mode. Before you label me a plutocrat, consider that for the majority of the middle class, the stock market has become their savings account.

[Catherine]

Hi! I work at CurrentForeclosures.com a foreclosures site. It is good news that the lenders are also pressured by the government to do their share in resolving the crisis. It just can not be solved by one sector alone. It should be a concerted efforts among the homeowners, lenders and the government.

While foreclosed properties are good investment alternatives, declining market is not a welcoming news.

[Jim Grandone]

PUBLIC EMPLOYEE PENSION PLAN STRUGGLE IN A SMALL MISSOURI TOWN

I thought some readers may be interested in going to this Web site to check out a story about a small Missouri town struggling with its public employee pension plan for the city's firefighters and police. After seven years of decline; the funding level for the police and firefighters' pension fund is at its nadir of approximately 57 and is on a watch list by the state. It reached a milestone yesterday when the Joplin, Mo. Police and Firemen's Pension Fund received a Report and Legal Opinion from an attorney telling them about their options. The link is below:

The Joplin Globe, Joplin, MO - Joplin trying to avert pension-fund ...The fund covers police and fire department workers for retirement, ... Joplin’s current ratio is about 57 percent. The law now requires pension systems to ...
www.joplinglobe.com/local/local_story_318204924.html - 17 hours ago - Similar pages

The same attorney, Dan Tobben, recently argued and won in the Missouri Supreme Court against the City of St. Louis Firemen's Retirement System. St. Louis issued more than $100 million in bonds to cover years of under funding the pension plans for its fire, police and non-uniformed employees (dtobben@dmfirm.com).

[Barbara Ann Jackson]

Subject: FRAUDULENT FORECLOSURES and Impediments to Judicial Remedies

The most critical component of the Nationwide FORECLOSURE Crisis is the problem of FORECLOSURE FRAUD. In almost all instances of foreclosure fraud, MORTGAGE LENDERS become enabled to ILLEGALLY FLIP properties.

In Louisiana, it is HIGHLY COMMON for a DEBT COLLECTOR attorney to file a foreclosure: (i) in the name of a DEFUNCT mortgage company;(ii) in the name of a mortgage company which is NO LONGER holder of the security interest (the promissory note); or (iii) file a foreclosure and AFFIX a 'ransom' amount (the collector’s fee) far exceeding what the promissory note "Acceleration Clause" authorizes.

Despite a property owner's entitlement to CHALLENGE CONTRARY-TO-LAW loss of his / her home, most property owners LACK consumer and legal knowledge; the Court System is REFRACTORY; and there is a SHORTAGE of attorneys with acumen to pursue this area of Consumer Law!

Also, when borrowers like myself sue for “Unfair Debt Collection Practices” and other damages, the collector gets to make more $$ through prolonged litigation, and reaping added billable hourly fees. As such, it is NOT HARD to conceive that $$ which should have been paid to Wall Street INVESTORS went to collectors and to association-in-fact" members of real estate fraud schemes who got a slice of the foreclosure pie.

Judicial Corruption is the underlying factor of New Orleans Apartheid conditions that became exposed due to Hurricane Katrina floods. The court systems as well as the Louisiana division of the U.S. Justice Department FACILITATES real estate and mortgage fraud here!!

As continuing reports of the massive outcomes due to the Mortgage Mess and Foreclosures, EVERY SECTOR OF THE ECONOMY IS AFFECTED BY THE FORECLOSURE CRISIS (businesses are shutting down, people losing jobs, property values decrease, as well as unlawful victimization & cheating of distressed property owners, and so on).

EXAMPLE: In my absence, a debt collector attorney conducted a simulated auction of my residence on May 19, 2005 by use of non-existent mortgagor GE Capital Mortgage Services’ identity. Although GE Capital Mortgage Services ceased to exist on October 25, 2002, documents were created to portray the successful auction bidder as defunct GE Capital, and the property deed was transferred out of my name and registered in the name of GE Capital. Months, later, 3 days before Katrina hit New Orleans, my family and I was evicted by a different attorney on behalf of mortgage giant FREDDIE MAC. According to falsified documents, Freddie is recorded as having purchased my residence from GE Capital in July 2005. To the contrary, as shown on the Louisiana Secretary of State website, GE Capital Mortgage Services became DEFUNCT on October 25, 2002, when it merged into GE Mortgage Services, LLC.! Therefore, it is impossible for Freddie Mac to have lawfully bought my house.

Default on my part, stemming from an abusive marriage, is a fact -and I was trying to negotiate, but the UNREASONABLE RANSOM and other extortion tactics by the debt collector hindered me. (Ransom-type repossessions / foreclosures in New Orleans have caused several pre-Katrina lawsuits by various homeowners.) Yet, illegalities pertaining to real estate fraud, as well as judicial corruption is common in Louisiana --and SEVERE REPRISALS become INFLICTED on people who do not cooperate with property extortion. Everything I have written here is verifiable in court records and transcripts; and overwhelming evidence is posted on my www.lawgrace.org website.

Also, Investors need to become more astute about how mortgage servicers' misdeeds hurts borrowers as well as siphons incalculable amounts of money from what Investors should reap. (See "Limiting Abuse and Opportunism By Mortgage Servicers," AND "Private Property Rights Deferred: Has Predatory Mortgage Servicing Destroyed The American Dream" by Rawle Andrews, Jr., Esq.,and Leroy Jones, Jr., J.D. Visit: http://www.msfraud.org/index.html.)

**Here's a few site links which clarify and prove what I've written:

"ILLEGAL REAL ESTATE FLIPPING..."
http://www.lawgrace.org/2007/06/21/illegal-real-estate-flipping-unfair-enrichment-etc/

"Anatomy of Judicial Corruption,. . ."
http://www.lawgrace.org/2007/09/04/motion-for-reinstatement-of-07-30426-appeal-case-explanation-of-request-for-extension-of-time-to-file-brief-and-for-reconsideration-of-5th-circuit-orders-dated-august-31-2007/

"No One Should Be Required. . ."
http://www.lawgrace.org/2007/05/22/no-one-should-be-required-to-be-a-law-abiding-citizen-if-the-manifest-illegal-conduct-of-attorney-herschel-c-adcock-jr-remain-ignored/

[noel rivera]

I believe that there are groups of peolple that are willing to help home owners with the problems that were created by people that knew exactly in what direction it was going to crash the mortgage problem. My bank, Chase bank was kept up to date in what curse I was heading when I was already having problems in making payments on time. I called them way before, I spoke to them explaining my hardship and one of thier representative called me one day asking me for a payments, giving me the opportunity to post date the payment until the end of the month. I did not have no late payments until the withdraw was place in my account for more then what I authorized. Chase bank withdrew 364.50 more then what there were authorized, puting me in a whole faster then what I was already going into. I called them, faxed them the evidence of what accurred and still to this day they have acted ignored my request to place the money back into my account. Including every check that came after that bounced and put me a position not to pay them after that, because I had to replace every penny back to my bank account that was in the red. Now I'm facing a foreclosure. I have about 18 days to responce back to the court of Polk county in Florida address 461 Spike Court, Kissimmee, Fl 34759. Please help!