DROdio Real Estate

Everyone knows the cost of foreclosure is high but I would argue that the side effects that go along with foreclosure, can, in some cases be even higher. Consider this: An article just recently appeared in “The Fairfax Times” which talks about the “unexpected consequence” of the vacant, foreclosed properties which become a breeding ground for mosquitoes. The articles goes on to state “As foreclosure rates and temperatures both continue to rise, there is increased potential for mosquito breeding grounds to develop and go untreated in and around vacant homes. Homeowners must be vigilant of pest problems on their own properties but also on the vacant properties near them.”

Anytime a home sits vacant, it can turn into a potential liability for the owner (the bank), as well as the surrounding neighborhood. All too often, the home can become a target for vandalism and I have also heard several reports of “squatters” moving into these properties as well. These two things alone can profoundly affect the look and the feel of a neighborhood and lower property values.

Local governments face consequences:

USA today reported in their May 15, 2008 edition that many cities are fighting back and suing the home lenders who are not taking responsibility for these foreclosed properties which they now own. “The Mortgage News Daily” says that typical local government “loses $19,227 through diminished taxes and fees and a shrinking tax base as home prices decrease”. Factor in the cost of the cities to take whatever action they deem necessary (including suing the lenders) to protect the neighborhood against loss, damage or the threat of the neighborhood values declining and those costs skyrocket. This doesn’t even take into account the peripheral damaged caused by the loss of revenue from the taxes that would normally be collected in a healthy market. The local governments will find a way to re-coup their losses and more than likely the neighbors of these homes will pay a higher cost tax-wise to compensate for these losses.

Renters pay the price too:

Homeowners are not always the only victims of foreclosure; renters can become unintended casualties in the foreclosure process as well. “CNN.com” reported that a resident of Laguna Hills, California, who had paid his rent on-time every month, was now being evicted as his landlord did not pay his mortgage. Realty Trac, a company that tracks foreclosures around the country estimates that at least 38% of the properties that go into foreclosure are not owner occupied and many of these have tenants in them. The thing that makes this especially frustrating for tenants is that they have fulfilled their obligations in relation to their lease terms. Many times, the tenant would even be willing to purchase the property but unfortunately, these renters end up mired in a lending bureaucracy backlog and are unable to make any in-roads with the banks who own the properties.

What about the animals?

Pets too can get sucked into the fray when someone loses their home through foreclosure. Many of these animals are either turned over to agencies to be “euthanized” or left for dead in the now abandoned homes. “Business Week” in an article entitled “Foreclosure’s filthy aftermath” reported that an animal rescue worker in Cincinnati, OH came across a home where the owner had been evicted that was housing more than 60 cats!

Are we done yet?

HUD Secretary, Alphonso Jackson, has estimated that one in four homes will go into the foreclosure process by the end of 2008. Unfortunately, it seems unlikely that we have even reached the height of this crisis. The “Mortgage News Daily” states that “according to the Joint Economic Committee of Congress, the average foreclosure costs $77,935 while preventing a foreclosure runs $3,300.” If this is truly the case, then common sense would say that steps need to be taken to put more foreclosure prevention programs in place.

Although the Bush Administration did introduce “FHA Secure” which is designed to help homeowners whose original interest rates have re-set and can no longer afford their mortgage payments refinance into an FHA mortgage, anecdotal evidence reveals that this measure is not quite living up to its expectations. Lenders have said that the restrictions for use are too narrow and that in order for someone to re-finance under this program, they still need to have made all of their mortgage payments on-time at their original payment amount (before the re-set) and have paid all of their other credit obligations on-time. Therein lies the rub….If a homeowner cannot pay his/her mortgage payment, which is the one bill that most everyone would pay first, how can a lender expect his/her other bills to be paid on time?

A silver lining? just maybe

If there really is a “silver lining” in all of this bad news, I think it’s this: The mortgage industry is in the process of a major reform that will benefit all both consumers and the real estate industry alike. Reuters says that “Congress and the Bush administration are pursuing reform proposals on how brokers qualify to do business; how they get paid; and how much information they share with borrowers.” As the American philosopher, George Santayana, said “Those who do not remember the past are condemned to repeat it”, let’s hope the message comes through loud and clear the first time around!

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