While the nation’s housing market continues to remain strong, home foreclosure rates are on the rise. According to the Homeownership Preservation Foundation (HPF), approximately 2.9 million foreclosures have been initiated in the U.S. within the last five years. After two months of decreases, the rate of foreclosures in Texas jumped nearly 200% in January 2006 – a statistic I found shocking!
There are five steps in the foreclosure process, but only two stages: preforeclosure and active foreclosure. Let’s look at those two stages and see where Texas stands. Preforeclosures are properties posted for foreclosure but not yet sold at auction. Essentially, preforeclosure includes stages 1-3 below. Texas ranks fourth behind California, Florida, and Illinois in preforeclosures. Active foreclosures are foreclosed properties sold at auction and now in the lenders’ real estate owned accounts. Texas holds the top seat in active foreclosures. While being number one is something Texans usually strive for, in this case we’d prefer to be much farther down the list.
These numbers paint a dismal picture, but before we become overly concerned, let’s try to understand why this is happening and what consumers can do to prevent it. As I mentioned, there are five steps in the foreclosure process: delinquency, notice to cure, default notice and posting, foreclosure sale, and active foreclosure inventory. Here is a brief description of each phase:
Stage 1 - Delinquency: Borrower is delinquent and makes no arrangement with lender.
Stage 2 - Notice to cure: Lender notifies borrower of delinquency. Borrower has 20 days to amend the problem.
Stage 3 - Default notice and posting: Borrower is sent formal notice of default and intent to sell property at foreclosure. In Texas, foreclosure sales occur on the first Tuesday of the month.
Stage 4 - Foreclosure sale: If borrower is unable to cure default, the property is sold. The lender will bid an amount equal to what is owed on the property. If no one else bids, the lender then owns the property and attempts to sell it directly.
Stage 5 - Active foreclosure: These are properties acquired by lender and held in real estate owned accounts. They are marketed just like any other real property.
Why is this happening?
One reason Texas ranks at the top of active foreclosures is our low home-price appreciation. According to the Real Estate Center at Texas A&M, Texas’ rate of home appreciation is the lowest in the U.S. While this can be good for the housing market in general, it may be bad for consumers who find themselves unable to make their monthly mortgage payment. In states such as California and Florida, homes have been appreciating at an astronomical level (hence the “bubble” talk we keep hearing about). In these states, homeowners who find themselves in stage two of the foreclosure process have a significantly higher probability of curing the default by selling – and possibly making a profit – than do Texas homeowners.
In addition, Texas ranks a woeful 45th out of 50 states in homeownership. As a result, many buyers today are first-time homebuyers who – to qualify for a loan – took advantage of the more-creative lending practices. With record-low interest rates and more-liberal underwriting criteria, many homebuyers opted for nontraditional loans, including interest-only and adjustable-rate mortgages. While a number of first-time homebuyers were able to get into homes, it seems that many are unable to keep them because of high property taxes, homeowner’s insurance, basic maintenance and upkeep, and the amortization of the nontraditional
There is another important factor in the high rate of home foreclosures in Texas: valuation of new construction. With a burgeoning population and new developments maintaining record levels, Texas is bursting at the seams. As our cities expand outward, so do our communities. New neighborhoods are springing up everywhere. While owning a home in a new development has its advantages, many consumers may not be aware of the valuation process. Typically in the first year, property taxes for a home in a new development only account for the land the home sits on.
After the first year, that property is reassessed and both the land and home are appraised. Based on the new value, many homeowners find themselves paying hundreds of dollars more each month – a change for which they are unprepared.
What can you do to prevent it?
As we all know, foreclosures are legal and are occurring with more frequency. But there are steps you can take to avoid foreclosure. Here are a few:
Work with a Texas REALTOR® – Find a REALTOR® you are comfortable with. Be honest about your financial situation from the outset. If you are on a budget – which most of us are – make sure your REALTOR® knows and understands. Texas REALTORS® are there to guide you through the homebuying process – from determining how much home you can truly afford to choosing a reputable lender. Most home foreclosures occur within the first several years of owning a home, so work with your Texas REALTOR® to avoid becoming a statistic.
Educate yourself – While your Texas REALTOR® can educate you on predatory lending practices and the overall costs of homeownership, it’s up to you to listen. Educate yourself on the various lending scams. Beware of unsolicited equity-lending calls and advertisements. Be wary of lenders or developers offering low-down or no-down. Again, your REALTOR® can discuss with you what loan products may work for you – pointing you in the direction of reputable lenders and away from predatory ones.
When purchasing a home, be sure to look beyond the monthly mortgage. Other costs to consider include property taxes, homeowner’s insurance, utilities, maintenance, and, depending on the neighborhood, homeowners’ association fees.
Protect your credit score – Most predatory lenders target individuals with poor credit ratings – it makes for an easier sell. The Fair and Accurate Credit Transactions (FACT) Act of 2003 made it possible for consumers to access free copies of their credit report. You can request one each year from each of the three main credit reporting agencies: Equifax, Experian, and TransUnion. You can do this online at https://AnnualCreditReport.com. I don’t recommend using other Web sites because there are a bunch of scams out there. The Federal Trade Commission advises consumers to use this secured site and be sure to correctly spell the link. Buying a home or not, it’s a service you might want to take advantage of.
What if you miss a mortgage payment?
If you miss a mortgage payment or are having difficulty making the payment, contact your lender immediately. Explain your situation. Provide them with financial information, including monthly income and expenses. If you offer this information without delay, most lenders will find a way to help.
When it comes to home foreclosure, there are no winners. Consumers, lenders, communities, and the overall economy suffer. Your Texas REALTOR® will work for you – helping you to avoid foreclosure in the first place and offering solutions if you find yourself in trouble. For more information on preventing foreclosure, read these 11 tips.
