Tough love for foreclosure victims
A for-sale sign in front of a foreclosed home in Antioch, Calif.
TEXT OF INTERVIEW
Tess Vigeland: Did you hear the latest from the housing market? According to the Case-Shiller index, prices dropped almost 9 percent in the fourth quarter of last year. Ouch.
And you know, to this day, nobody seems to have a true handle on a solution to the whole mess.
The latest suggestion from congressional Democrats is a bill that would change bankruptcy laws and allow judges to cut mortgage interest rates. The White House has said "no way -- that's a bailout."
So what would work? Today we talk with someone who thinks many troubled homeowners could, and should, face the music.
Lou Barnes is a mortgage broker and columnist.
Vigeland: What's your take on the foreclosure mess at this point?
Lou Barnes: A great many of households facing foreclosure are inherently weak -- financially weak -- and will tend to defy workouts, no matter how well intended and no matter how energetic.
Vigeland: Why is that? What's wrong with these households?
Barnes: The mortgage underwriting standards used for most of these threatened foreclosures and the ones in process are inferior to the underwriting standards of the old minimum, which was the FHA, the Federal Housing Administration, going all the way back to 1934 and the weakness presents in three places. The first one is the need to prove income: always required in a small down-payment FHA loan and increasingly rarely done post 2000. The second weakness is the structure of income, the need to have some kind of income stability that would see you through a tough time. If you're in sales, if you're in intermittent work, you're more vulnerable. And the third piece is you've got to have some cash around the house. There's got to be some money in savings, even if it's in retirement accounts and the nuevo-mortgage template often didn't require it at all.
Vigeland: And what you're saying is all of the efforts out there to try to rescue homeowners who are either in or going into foreclosure, that there is, what, a good percentage of those that simply are not rescuable?
Barnes: Even if we rewrote the interest rates lower, even if we eliminated the heavy adjustments in the classic subprime suicide loan, the minimum payment required is still beyond the ability of many, if not most, of these households.
Vigeland: So, do you think at this point that we should just give up on these folks going into foreclosure?
Barnes: The foreclosure hotlines and workout efforts will be productive only for those households that were strong households to begin with and have suffered bad luck: a transient health problem, a divorce, a job loss and a new job found. The households that can't manage the current payment, we'd make the ultimate problem worse by trying to help those that can't really survive this.
Vigeland: The federal government has talked about and/or implemented programs that freeze interest rates, stall the foreclosure process. If those aren't going to solve this current problem, what do you think should be done, if anything?
Barnes: The foreclosure peak is some five or six years in the future. We're only two years past the market peak at roughly January 2006. A key thing now is to make sure that there's adequate new credit available. The worst of the credit crunch underway is not the foreclosures, but the starvation of new credit for people who would buy these houses out of foreclosure.
Vigeland: So, we can let some of these houses, perhaps a good percentage of them, go ahead and go into foreclosure, but then you need that credit to bring a new buyer?
Barnes: Yes ma'am.
Vigeland: What do you say to those that think this is a little harsh?
Barnes: My mother, as a teenage girl, lost her house in Ada, Oklahoma, after her dad died in the middle of the depression. The terrible shock that lives on from the depression is that strong households, having made no mistakes in judgement about their resources, were knocked over by an external economic shock. In this one -- and I mean no unkindness to the families involved -- the temptation of credit that should never have been available has magnified the pain that'll be in the households that lose their houses. With sustainable new credit, many of these households will wind up as homeowners, but the next time they'll be buying houses that they really can afford.
Vigeland: Lou Barnes is a mortgage broker in Colorado and also a columnist for the Boulder Daily Camera. Thanks so much for your time today.
Barnes: Thank you Tess.