The Housing and Mortgage Markets Are Much Worse Than It Appears
Recent news does not bode well for homeowners or investors in mortgage-backed securities. According to Mark Zandi, chief economist at Moody's Economy.com, lenders are distorting foreclosure rates and delaying the worse of the housing decline by allowing delinquent homeowners to remain in their homes long after they have defaulted on their mortgages. While such actions could appear to be positive at first blush, the lenders are effectively delaying the flood of foreclosed homes that will inevitably hit the housing markets. This is likely to extend the period of an unstable housing market.
"We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said. "Looking at the data, we see the problems, but they are probably measurably greater than we think.''
"Some people stay in their houses until someone comes to kick them out,'' said Angel Gutierrez, owner of Dallas-based Metro Lending. "Sometimes no one comes to kick them out.''
Lenders are reluctant to foreclose on homeowners for a variety of reasons, but cost is the driving factor. Legal fees and maintaining a vacant property while paying insurance and taxes can add up to as much as 15 percent of the value of the home. Furthermore, it can take months for the legal process to complete a foreclosure, which means that the lender has to manage the upkeep on the house in the interim, rent out the house or sell the property all at its expense. In many cases, lenders also have been forced to foot the bill for fixing up vacant homes which have been vandalized.
Michigan real estate broker Georgia Kapsalis says that lenders are getting wise by allowing borrowers to stay in their homes longer. "Some of the banks just don't want the houses to be empty, especially if it's in an area where there's a lot of theft or there are five other houses empty on the street,'' Kapsalis said.
Howard Fishman, a real estate investor based in Minneapolis notes that with home sales dropping and national inventories rising, lenders have another reason to delay foreclosures. "What are the banks going to do?'' Fishman said. "They don't want the house. They have a mortgage for $1 million and the house is worth $750,000.''
Few lenders will publicly admit that they allow homeowners to stay in their homes rent-free. Unfortunately, the day of reckoning will inevitably have to come.
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