What causes foreclosure? Countrywide's claims

By
Mortgage and Lending with American Midwest Mortgage NMLS142066/250013

I have been looking for this information.     I personally believe that the primary issue is Income as Countrywide says.   This is a result of our weaker economy, people are not getting the hours they did a few years ago and also some are being laid off.  Do you agree or disagree with this article.???  

I do know that the GAO is considering doing a study.  If anyone has any other links to other data please post that link here.   

What causes foreclosure? Countrywide's claims

Countrywide, in its presentation yesterday in San Francisco, made some fascinating arguments about what's causing the foreclosure crisis.  Countrywide CEO Angelo Mozilo "criticized media coverage of the mortgage meltdown several times Tuesday, saying reporters incorrectly blamed 'aggressive lending and exotic reset products' for rising foreclosures."

So what's driving foreclosures? Here is Countrywide's breakdown -- based on information from its servicing portfolio -- when "cause of foreclosure" is known (80.3%), the breakdown is as follows:
--Curtailment of income: 58.3%
--Illness/Medical: 13.2%
--Divorce: 8.4%
--Investment Prop./Unable to sell: 6.1%
--Low regard for property ownership: 5.5%
--Death: 3.6%
--Payment adjustment: 1.4%
--Other: 3.5%

We find this fascinating on several levels, and inconsistent with most analysis we've seen. To start, we should point out, there is probably no institution in America -- including the media and the government -- that knows more about the current crisis than Countrywide. The government doesn't collect timely data on foreclosures; Countrywide does. If this is Countrywide's best, most honest assessment of the true causes of foreclosure, it's shocking: it indicates foreclosures are spiking due to economic weakness -- "curtailment of income" -- that is so faint it barely shows up in economic statistics. If this is what happens in a fairly strong job market and a growing economy, what happens in a real recession, when unemployment rises significantly?

And if "payment adjustments" are not a problem -- as Countrywide argues -- what good would it do to refinance these loans?

There is one plausible explanation: borrowers were so aggressive -- and so hopeful -- that they essentially planned for economic perfection, and the slightest negative deviation from that plan -- say, an unexpected drop in overtime earnings for hourly workers -- is sending them into default and foreclosure.

But here is an equally plausible explanation: That the "research" is really spin -- Countrywide is eager to answer critics and argue that its own underwriting was not a factor in the foreclosure spike -- that it was entirely unforseen and driven by economic events out of the company's control.

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Comments 16 New Comment

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Anonymous #1
Anonymous
Anonymous

Tim:

Income is a major factor.  Also, expenses and property devaluations.  When the ARMs adjust that's an added expense.  Owners who are upside down + their ARM is recasting may decide to walk.

November 02, 2007 09:20 AM
Rainmaker
371,572
Leigh Brown
Broker/Owner - Charlotte NC
RE/MAX Executive Realty

Where is the factor for folks who use their homes as ATMS and have borrowed themselves to the hilt?  Have they curtailed their own income by increasing their outflows?

I totally agree that government intervention isn't needed to handle the foreclosure issue-I still want to know when personal responsibility will be addressed by someone other than a blogger?

November 02, 2007 09:23 AM
Rainmaker
72,936
Larry Morris
Larry Morris, NMLS 150073
HomeServices Lending
While income is a factor, it would be interesting to see how many of those bought more home then they really should have and weren't in a position to weather a financial storm.
November 02, 2007 09:24 AM
Rainmaker
56,337
Nicholas Christopher
Communication Is Key
Century 21 Rauh & Johns

Good post. Income is always going to be a factor.

November 02, 2007 09:32 AM
Rainmaker
672,668
Rob Arnold
Metro Orlando Full Service - Investor Friendly & F
Sand Dollar Realty Group, Inc.
Job loss has always been the biggest factor for sure.  Even during the good years.  These ARM adjustments are crippling some families though.  Of course I remember talking about what was going to happen when these ARMs adjusted back in 2004.  Everyone knew it was coming.
November 02, 2007 09:33 AM
Rainer
8,519
Pattie Adkins
Pattie Adkins, Broker
Hi Tim!  Great post!  Personally I think if property values in the states with the highest percentage of foreclosures were holding steady then people would be able to refinance when their loans adjusted.  Although I realize income is very important to refinancing ability, if the homes were to hold their values the homes would be able to be sold if the owner could not refinance.  Holding property values would probably have an impact on the saturation level of the market as well.  So I guess I have mixed feelings on what Countrywide is saying.
November 02, 2007 09:35 AM
Rainmaker
211,657
Tim Bradford
NMLS 250013
American Midwest Mortgage

Larry,   I agree a number of people were permitted to purchase homes without the fiscal responsibility to do that.   They also purchased homes beyond their limits.    Was it the lenders that financed those loans or the Realtors that sold those homes???

Leigh  The other day someone posted information on http://www.govtrack.us/congress/billtext.xpd?bill=h110-3915   The bill was just proposed in congress on Oct 22, 2007.    My initial reading of the bill is that it is similar to Ohio HB 185 that took effect Jan 1, 2007.    As a responsible Lender, I believe it imposes unnecessary paperwork.   If the government would only enforce current laws instead of passing new ones we would me much better off.  

Bill -   Any insite into what cause the property devaluations???    Was it the chicken or the egg???  Which came first?

November 02, 2007 09:39 AM
Rainmaker
996,054
Karen Anne Stone
Fort Worth Real Estate
New Home Hunters of Fort Worth and Tarrant County
Tim:  The great majority of homeowners that I know who are flirting with foreclosure... in almost every case... it is because of either drop in income, or total loss of it.  It is an ever- increasing snowball that needs to be stopped soon.
November 03, 2007 01:16 AM
Rainmaker
211,657
Tim Bradford
NMLS 250013
American Midwest Mortgage
I got a call yesterday that HUD referred to me for a FHASecure Loan.  Here are the Details.   The lady quit her job earlier this year.   She is working part time earning 8.00 per hour.   and has averaged 500 per month so far.    She is presently 3 monts overdue on her mortgage.   Her payments jumped from 350.00 per month to 525.00.    Her home is valued at 75K and owes 55K.   If I were able to refinance this lady her payment would likely be 420.00 per month.  (PITI)   What do you call the cause of her Delq and if the propery is forclosed what would be the cause???    No I can not refinance to a FHASecure because of insuffient income.   I believe a non Conforming loan is unlikely because of the current delq and limited income.     Anyone have any ideas.
November 03, 2007 06:57 AM
Rainmaker
289,811
Kate Bourland
Onlilne Marketing Mobile Marketing
Marketing with Kate

Tim, these stories are very sad. 

I agree that income is a factor in stalling the housing market, I'm not sure that it's a factor in the foreclosures?  That doesn't make sense.  If you could afford the house when you bought it why can't you afford it now?

I think that these are two different issues.

November 03, 2007 11:33 AM
Rainmaker
996,054
Karen Anne Stone
Fort Worth Real Estate
New Home Hunters of Fort Worth and Tarrant County
Hi Tim:  I think another reason why many homeowners are close to foreclosure has to do with the fact that their 80/20 mortgages did not have an escrow account.  Although the new buyers were told this at closing, and also signed acknowledgements to that effect, many were caught off-guard when the tax bill for $4,000 to $5,000 or more came, and they had no money to pay it.
November 07, 2007 04:09 PM
Rainer
10,645
Sun Lakes Realty Banning, CA
Sun Lakes Realty, Inc.

I think in some cases in California, just like what Leigh said, homeowners used their homes as cash machines to purchase cars, boats, RV's, plasma TV's, etc all the while knowing their payments would increase over time.  I believe most thought that the machine wouldn't dry up and now it has and they can't refi or sell the home because the values are decreasing.  It's poor financial planning and in the end the homeowner has to be responsible.  In this case it shouldn't be the government or the lender.

I agree with Larry Morris also, It would be interesting to see how many folks bought a home they really couldn't afford and went beyond their means counting on the fact that they might earn more money next year and the year after?  Some would do anything to be in the bigger, newer and better home no matter the cost.

January 16, 2008 02:42 AM
Anonymous #13
Anonymous
Anonymous
My input is job loss and consumer irresponsibility.  This is the cause.  Chuck Schumer, et. al. should stick to doing what they don't do best - managing our country.
January 17, 2008 10:08 AM
Rainer
27,957
Matthew P. Klein
Transaction Realty

If you want to refer to income as a problem because of job loss then perhaps we should re-examine what is causing that job loss? It would be easy to just say that it is jobs going elsewhere or overseas but here, especially in the North Eastern Ohio area there are not many places that are business friendly. Further, with all the regulations laid upon businesses (ie. environmental concerns for manufacturers, permits on top of more permits for any kind of construction) the local government structure has too much beaucracy taking too long to move anything. Hence, the employment opportunities move elsewhere.

It would also be nice to blame over aggressive loan officers and exotic loans but where are the demands coming from to make these loans? Who is telling loan officers that they have to make so many loans in "x" location? Sure, there is consumer irresponsibility but when you have Washington promoting and financing with government funded dollars (ie. yours and mine tax dollars) that everyone has a right to own a home, it's setting up the game for disaster. Homeownership in this country is a privelege, not a right.

 

April 01, 2008 03:10 PM
Rainmaker
211,657
Tim Bradford
NMLS 250013
American Midwest Mortgage

Matt,

Thank you for expressing your thougths here.  I did read your post The US Economy vs. The Free Market and have to agree with most of your statements.   I assume you are aware of Ohio SB185 that took effect over a year ago.  HR 3915 sounds to cover the same subjects you mention in your post about "reasonable ability to repay" and "in the consumer's best interest". 

Regarding, Washington promoting that everyone has a right to own a home.   I did read an article recently that attributed this principle to Clinton, the article went on to say that Bush continued the same attitude.  I agree with you that homeownership is a privelege that is earned.  Another fact I read recently was that in 2006 40% of all loans written were Stated Income loans.  I believe beyond the Job Losses you mention these stated income (or no income) loans also were part of the problem.  You might also like to read http://www.oag.state.ny.us/press/2007/nov/EA%20Complaint.pdf  .   I believe it is the Basis of FNMA's "Appraisal Code of Conduct" that will take effect 1/2009.  

April 01, 2008 03:58 PM
Anonymous #16
Anonymous
Anonymous
Consumer irresponsibility is a big factor I feel in the foreclosure crisis.  Also mortgage brokers putting people in the wrong products and not educating them hasn't helped matters.  I like how Angelo of Countrywide puts the spin on income decreasing.  While this is true, I would think it can't account for a majority of foreclosures.  People buying more home then they could afford to start with and negative amortized mortgages have been lethal.  Also mortgage guidelines got way too loose.  Too many 100% financing options for sub-par credit and too many stated income and No-doc loans. 
April 02, 2008 02:15 AM
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Rainmaker
211,657

Tim Bradford

NMLS 250013
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