This is going to be an analysis by a real estate broker. I have been selling homes for over 30 years. I am so tired of reading the papers and seeing the explanations on foreclosures.
The papers blame appraisers. They blame the derivative markets and other causes, and they are mostly wrong. For the future, for the truth, I am going to list the real causes. You can read them and see if they ring true to you.
The first cause is the biggest one: Employment. The corporations found cheap labor in foreign countries, and they took advantage of it. The corporations have, for profits, shipped every job possible overseas to cheaper labor markets.
This is true for management, production, design and every other possible job. If it can be done overseas, they send it there. Their stocks are up, as indicated by the stock market, but their in-country jobs are down.
In particular, manufacturing jobs have been sent overseas for years. With no manufacturing jobs we have a weakened and dwindling job base, and people are unemployed. Without a job, people cannot make their house payments. They cannot buy a newer car, or move up into a larger home. It is simple. No jobs, no house sales. Prices go down, and there is no employment to take up the slack. It is a continual downward spiral.
In fact, it causes a cascade in values. The $600k house goes to $500k, and so on. This creates sellers in every price range that owe more than the house can sell for. If you owe more on your home than you can sell it for, it eventually becomes a business decision: Do I pay for this house that is $100,000 upside down in value, or do I let it go? If I can’t sell it, and I don’t have a job, what options do I have?
That leads us into the second cause: Bank financing is essentially a nationwide monopoly. You go to a bank, pay exorbitant fees to the bank, and get a 30 year loan that is amortized. An amortized loan is designed to pay more interest up front, and more principal at the end.
This design takes away most of the principal payments for the first 8 years in a 30 year loan. As an example, a borrower pays off only $26,000 on a 30 year loan in the first 6 years of payments at 6 percent. A straight payment loan would pay off $60,000 in that same amount of time.
Now, imagine if you had paid for 6 years, and you only owed $240,000 on your 30 year loan. You would have $60,000 equity, and you would fight to save your home. You might have actually paid your loan down to its value, even in a seriously declining market.
Instead, you owe $274,000, and any small decline in the market means you are in trouble. This is the way loans are designed. They make the banks money, and pay off the loan so slowly that few owners ever pay off enough of their loan to be financially sound.
If this system were modified, 90 percent of the people in trouble would not be in trouble. They would have equity, or at least be equal in their loan amount to the devalued price of their home. It is a simple concept.
Just think about it for a few minutes. It is not much different than the credit card rip-offs that have been going on for years, except with much higher loan balances. Note that not one lender has ever come up with a straight payment loan. Not one. Ever.
The third reason: The third reason has to do with banks too, but in a different way. Banks let you borrow the money, but then they tell you the loan is not assumable. Imagine if all of the loans that are in default were assumable by qualified buyers. Almost every home would sell to an investor or another homeowner if they could assume the loan.
Many investors will buy a rental with $10,000 or $20,000 down, and then live with the negative cash flow. Many buyers would buy a home with a good interest rate qualifying loan, but they don’t get the chance. Lenders refuse to allow this, because they make billions of dollars in profits from “churning” loans.
They make loans on the same house multiple times, charging fees for every loan. They wouldn’t make these profits if the loans were assumable, and we all know the system is set up to be profitable for the banks.
Imagine that you are one of the homeowners in trouble. You have a loan of $250,000 that is assumable. Your loan is no longer a detriment, it is an added value. Your loan had value to other buyers and investors. Your loan could actually be the reason your home sells.
But, in this bank dominated economy, you do not have that choice. I wrote a blog a year ago, speculating an easy way to stop almost all foreclosures, and it is free. Let all loans be assumable with qualifying. All loans. The market would have saved itself, without the trillion dollar donation by the federal government. As it is, the billions they put in to save the market had little effect. Non-assumable loans would have cured it.
The fourth reason: Banks have no facilities or program to help people in financial trouble. Let’s take the first loan I mentioned. That buyer paid his payments for 6 years. He is in financial trouble because he has lost his job. The banks have received $26,000 in principal payments from him, and over $100,000 in interest payments. The bank has received over $126,000 in payments in 6 years, and they can’t and don’t even try to work with that owner.
The bank should figure out a way to keep that person in the home, with reduced payments and deferred payments. They have already received more than a third of the money they have loaned out as payments. Yes, let me repeat that: They loaned $300,000, and they have received, in 6 years, $126,000 in payments.
The owner has actually made payments equal to more than one third of the loan amount, and the bank will foreclose on that home and think nothing of it. Do the math. Check it out on your own. They loaned $300,000, and in 6 years of payments, they have received $126,000 in payments. That is one more than one third of the entire loan amount in 6 years. 6 Years! Do you call that a fair system? Do you think that is in any way reasonable? Wouldn’t it be reasonable for a bank to work with someone who is paying such an unfair amount to pay off his loan?
The system is stacked against homeowners from the beginning.
Now, before you think you are not at all at fault when you have a foreclosure, let me be clear.
If you borrowed on your home more than two times to pull out equity, you goofed up. Homes are not meant to be savings accounts. You have played into the hands of the banks and their unfair finance programs.
If you are a normal owner, and you have had job problems, and more, it is not your fault. If you are a normal homeowner, and you have seen values falling on homes near you, you have done nothing wrong. You are in reality an unknowing victim of the system. And, be sure, the system is designed to help banks and corporations, not you.
Most foreclosures have nothing to do with the buyer, appraisal, or anything else. Most foreclosures are happening because the lenders have unfair financing, and the economy has been ruined by National Corporations who have sold our jobs overseas in the name of profit.
There. Now you have the truth for the history books. It is not lazy Americans. It is not bad appraisals. It is the economy and the banking systems and their high profit programs that have caused this problem.
Sit back and think about this idea. With assumable loans we would be able to sell many more homes, but the banks do not allow it.
With a fair and reasonable payment structure on the long term loans we take out on homes, we would have equity growing in our homes at a much faster rate, and foreclosures would be less likely to occur. With an economy that employed workers in America first, we would have much better employment, and fewer foreclosures. If we had all three, we would not be in this mess at all.
Truth is knowledge.
Randy Brown lives in Littleton. EDITOR’S NOTE: This is an online-only column and has not been edited.
