Economists have recently expressed concerns because foreclosure starts have started to increase in some of the country’s largest housing markets.
In the third quarter of 2017, almost 25% of the nation’s largest metropolitan areas have seen an upturn in foreclosure starts, which is when banks initiate foreclosure proceedings on a delinquent home loan. Areas that have created a cause for concern include, Austin, Dallas, Denver, Nashville and Columbus, Ohio.
The causes behind these foreclosure starts are several, including middle class underemployment, quick-and-easy loan programs and an increase in debt among pensioners. Economists worry that this trend could have a negative impact on the housing market and undercut economic recovery in certain parts of the country.
Experts fear a rehash of the 2008 economic crisis when many homeowners went underwater, owing more on their mortgage than their homes were worth, which resulted in countless foreclosures. On the other hand, some industry observers an increase in foreclosures could also signal a streamlining of foreclosure procedures due to an increase in property values that may make it easier to sell homes.
Austin and Columbus have both reported an intensification in foreclosures that they hadn’t witnessed since 2012, when the economic crisis hit rock bottom, meanwhile Nashville and Dallas had experienced a two year drop in foreclosures before this year’s increase.
Most of the foreclosures in Austin, Dallas, Denver, Nashville and Columbus are for loans that were taken out after 2014 when banks began offering mortgages with down payments as low as 3 percent, says Daren Blomquist, a ATTOM Data Solutions VP, who tracks foreclosures. The low down payments attracted many new home buyers, who are less inclined to keep up with payments when they hit a rough patch.
“With lower down payments, the borrower has less skin in the game, and that’s just inherently riskier,” he says. “It can take a few years for the chickens to come home to roost, and I think that’s what’s starting to happen.”
In Ohio, the foreclosure process was simplified in 2016 when a new law made it easier for abandoned homes to be foreclosed. Rep. Jonathan Dever, who sponsored the bill, says that Cleveland and Cincinnati had been inundated with “zombie homes,” abandoned properties that banks have not been able to foreclose because the process was more expensive than the value of the home.
“These houses were just sitting there contributing to blight and crime, and now the banks can sell them, people get more housing, and neighborhoods don’t have the problems,” Dever said. “Everybody’s happy.”
Many observers in the industry believe the new law will help improve the marketability of abandoned properties by not allowing them to remain endlessly vacant and deteriorate.
“I think this bill is absolutely going to change the industry, because what this bill does is when a property goes vacant and is abandoned, instead of taking two years or three years for the property to go to foreclosure, it will allow the mortgage servicer to get possession of the property while it’s still in decent shape,” says Robert Klein, chairman of and co-founder of Ohio-based property preservation company SecureView. “Maybe not the best of shape, but it’s in decent shape, and will be able to market the property.”
Also, by accelerating the foreclosure of abandoned properties, lawyers can focus on cases in which homeowners are fighting to keep their homes.
Ohio Attorney General Marc Dann, who represents many homeowners, says, “The idea is this: Let’s move the abandoned properties to the front of the line, and for those who are trying to save their homes, that will give us more time to slow the process down and reach a resolution with the mortgage lender.”
Some argue that rushing the process could backfire. Frank Ford, senior policy adviser at the Western Reserve Land Conservancy, a housing advocacy group in Summit County and Northeast Ohio, says that lowering the purchase price of homes could negatively affect area home values and invite buyers looking to make a quick buck by flipping a property.
“In a perfect world, yes, getting them [back on the market] under any circumstances would appear to be a good thing, but if you’re only attracting the bottom feeders,” Ford says, “they’re either people who do not know what they are doing or have no intent to bring the property back to a stable position in the community.”
The law also gave homeowners options to avoid foreclosure, which include allowing homeowners to stay on their property for two years as renters while they sort out their financial difficulties. To do so, they must relinquish the title of the home to the bank.
Though job security has improved in recent years, so has underemployment, as many middle-class homeowners are locked into part-time or low-paying jobs and can no longer keep up with payments.
“A stronger economy doesn’t necessarily translate into stronger income for homeowners,” says David Berenbaum, CEO of the Homeownership Preservation Foundation, a nonprofit that oversees a telephone hotline for homeowners facing foreclosure.
One of the reasons for the increase in indebtedness among retirees is that many are still shouldering their children’s student loans. Over the past decade, the number of people over the age of 60 with student loan balances grew more than any other age group, according to the Federal Reserve Bank of New York. The total amount increased by more than nine times, from $6 billion in 2004 to $58 billion.
“Most clients find me because the collection activity that they’re facing is preventing them from paying their utilities, from buying food for themselves, from paying their rent or their mortgage,” says Joanna Darcus, a consumer rights attorney at Community Legal Services of Philadelphia.
The irony of the situation is that many retirees thought education would be the path towards a higher income bracket.
“Among many of my clients, education is viewed as a pathway out of poverty and toward financial stability, but their reality is much different from that,” Darcus says. “Sometimes it’s their debt that keeps them in poverty, or pushes them deeper into it.”
While the increase in foreclosures in large urban areas is worrisome, it is forcing lawmakers to address long-standing problems within the mortgage market, welcome news for those looking for options when it comes to avoiding foreclosure.