By: Stephanie Diana Gast- Wilson
I get asked a lot, “Why are there so many new regulations?” and, “Why are all these underwriting guidelines so strict… it’s like they don’t want to lend money”. It’s not that lenders don’t want to lend that’s counter productive to the industry they are in. Lenders just don’t want to suffer and in turn cause customers to suffer as much as they did with all the foreclosures in 2008.
No one wants to think about the prospect of foreclosure. However, no matter how wealthy a person is today the crash of 2008 showed many of us how quickly that can change. So while researching “probabilities” for a project in my masters’ course on Quantitative Analysis it got me thinking about how have probabilities and quantitative analysis influenced the issues in foreclosure. While researching this I stumbled across an article published by the University of Michigan http://www.umich.edu/~reecon/restate/faculty/Capozza/CondREE.pdf where they took a totally different approach to calculating our probability of foreclosure. The past mathematical evaluation models (which the paper points out were done in the 1990’s) calculate the probability using a method that sees the risk as risk free. Meaning that the benefits in a home loan for the lender out weigh the risks, however; this article looks at the possibility of the risks not zeroing out the gains.
A great way for those of you in the mortgage field can rationalize that concept as in 2008 when homes were being foreclosed on they had a loan or loans that were a higher value than the unit it self. So, many of us had to deal with short sale negotiations where the amount of the loans were exponentially more than the value of the property it self.
So this got me thinking what is a person’s likeness of foreclosure? And what if anything can we each do to avoid foreclosure ourselves? When I searched the former I found an article on http://www.propublica.org/article/by-the-numbers-a-revealing-look-at-the-mortgage-mod-meltdown which takes a deep look at the crash. In it the article looks at the fact that there were so many deals to get a person in a home with little to no money down and Adjustable Rate Mortgage (ARMs) loans that had balloon payments that many didn’t understand about. In a nut shell it proves the paper done by Michigan State and that the analysis models used didn’t factor the risks as heavily as it should have.
Interesting when researching how likely one is to be foreclosed on a foreclosure risk calculator appeared. http://www.spreadsheet123.com/calculators/foreclosure-risk-calculator.html. Basically it examines your property value, loan amount, duration of loan, … and spits out the monthly interests rates, number of payments, how much a borrower would pay per month and how the lender would profit. It even shows the functions used in excel to create the math to validate the information provided.
Now for the tough question how to avoid foreclosure. Sometimes personal circumstances can’t be avoided so a good step is to familiarize yourself with http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure which has information on what options you have when you are at risk of foreclosure at the loan level such as a Making Homes Affordable loan (MHA).
As noted on NOLO.com’s article on this topic walking away should note be your primary option. Though it is well known that foreclosure can be a depressing and stressful endeavor NOLO advises in their article, http://www.nolo.com/legal-encyclopedia/how-avoid-foreclosure-29766.html to talk to your lender. Many do have programs to help you keep up with your payments. Remember lenders are in the business to lend they make more money by working with you so don’t be afraid to make that phone call. These other articles are a good place to look for tips at the loan level:
Foreclosure and all the information regarding the topic is daunting and down right scary. However, the old saying about knowledge being power is very true in this case. So, the best way to avoid foreclosure is to stay tuned to what options and information are out there. Researching this topic before it becomes a personal problem is a step in the right direction to protecting the biggest investment most of us ever make… in a home.