Show #394 Airing Sunday, 7/15/07
Sometimes it's good to be at the top of a list. Sometimes it's not. Cleveland ranks at the top of the nation in home foreclosures. So what does that rating mean for potential buyers and sellers? Here to explain is our #1 real estate expert (on the good list, of course), Bridget Connor from Gateway Title Agency.
Question:Ohio, and especially Cleveland, tops the nation in foreclosures. How did we get so lucky?
Answer:There are several reasons. First, the loss of manufacturing and other jobs has hurt the area.
Also, there is a lot of predatory lending occurring. We have people coming in to close real estate transactions who are buying a home worth $60,000, but their loan is for $90,000. They somehow believe that they will actually be paying a loan for $60,000, because their lender has misled them. Someone is pocketing that $30,000 extra.
I have refused to close transactions, have pointed out the discrepancies to buyers, and have seen the deal close the next week through another title agency. People are so emotional about buying homes that they want to listen to people who tell them what they want to hear, but they end up having to make payments on loans that they cannot afford.
Question:What are 80/20 loans?
Answer:Another contributor to foreclosures in this area is the use of 80/20 loans. In this type of loan, you take one loan for 80% of the cost of the house and another loan for the down payment, or 20% of the price of the house. People think that this strategy is a way to avoid PMI, or private mortgage insurance, which is required if less than 20% equity is put into a house upon closing.
However, this means that the buyer has to pay two loans, and often these two loans total to a higher payment than if they just took one loan for 100% of the house's total cost and purchased PMI.
Really, an 80/20 loan stretches people to the point where they can't afford what they are buying.
Question:What other types of loans can be problematic?
Answer:Other types of loans that can lead to foreclosures are "Interest Only" and "Optional Payment" loans. An "Interest Only" loan means you are only paying off the Interest on the loan; then when the market changes, you may loss market value. If that is the time you need to sell, you're probably selling at a loss, which puts you in the negative (you owe more on the house than it is worth.)
With "Optional Payment" loans, you have your choice of four different payments:
- Less than the interest (the balance of the interest gets added to the principle amount of your loan)
- interest only
- payment amortized over 15 years
- or payment amortized over 30 years.
Which payment do most people take? The lowest of the payments, but they don't quite understand that there will be a few hundred dollars added to the loan balance every month.
Question:What do foreclosures do to the market?
Answer:On a local level, there are lots of empty houses, leading to deteriorating neighborhoods. This lowers sales prices. Also, because of predatory lending, the asking prices of homes are artificially inflated. Neighborhoods where homes should be selling on the market for $60,000 are on the market with a $90,000 asking price. That's just to cover the mortgage. But at these inflated prices, homes don't sell. And lenders are going belly up due to foreclosure losses.
Question:How can we protect ourselves?
Answer:As a buyer, make sure that you go to a reputable lender, such as a bank or a savings and loan. If they tell you that you cannot purchase a home at this time, listen to them. They will give you suggestions of what you can do to be able to buy a house in a year or two.
When it is time for closing, use a reputable title company. The title company should be a disinterested third party, not one that's affiliated with the lender, buyer or appraiser. If they are not, or if you have never heard of them/can't find them in a phone book, do not use them.
Get educated about the deal to buy or sell. The paperwork is overwhelming, so people sometimes don't even try to understand. But if you take one page at a time, you really are capable of understanding it.
Foreclosure is not a foregone conclusion if you work with reputable lenders and title companies. To educate yourself at a free workshop, or for a free newsletter, give Gateway Title a call. The number's next. My thanks to Bridget Connor.
