MORTGAGE FORECLOSURES: Behind the Numbers

Probably your home is not among the 1,073 that have faced mortgage foreclosure in Saginaw County during the past 12 months.
Still, the home loan default crisis may affect you.

 Property values already are starting to fall in most neighborhoods. When the assessment process finally catches up with the market place, local tax bases may shrink and basic government services may suffer.

Furthermore, if you wish to sell your home, you will have a tougher time. And even if you make a sale, it's doubtful you will get full value.
"This is scary," says Mark Neumeier, longtime director of Neighborhood Renewal Services, which strives to promote home ownership with a blend of funds from the federal government and private financial institutions.

"It's a problem that isn't going to go away any time soon, it's a problem that will affect entire communities, and to tell the truth there really are no good solutions."

Neumeier's research indicates that Saginaw County's foreclosure total is more than double the number as recently as two years ago, and a whopping 10 times higher than during the middle 1990s.

The mortgage crisis is nationwide, with forecasts of up to 2 million foreclosures in the year to come.

Some analysts say today's housing market suddenly has become the worst since the Great Depression. The Rev. Jesse Jackson echoed those thoughts in a highly publicized recent Michigan tour that included Saginaw.

President Bush is urging lenders to show teamwork in compromising on mortgage terms, while Democrats are taking a step beyond by calling for direct infusions of federal aid.

Low Income, High Income

Troubles are most severe in two types of areas. The first area is in distressed communities such as Saginaw, in which people are struggling with declining incomes and overextended credit. The second area, ironically enough, is in upper-scale developments in places such as Florida and Arizona where speculators face a stagnant market.

Neumeier is capable of giving a full hour's dissertation on the causes, but for our purposes he sums up in a nutshell:

1) Many people, not just those with low-incomes, have become submerged in debt during the past three decades.

2) Lenders, and in many cases brokers, began offering alternative forms of 'subprime' home mortgages during the 1980s and all the way until a year ago. Terms were so flexible that almost anyone could qualify, especially with adjustable rates or balloon payments. Some loans were so loose that buyers could pay interest only for the first few years. The problem was that interest rates usually were in double digits.

3) Suddenly in 2007 it's time to pay the piper, so to speak, and many buyers are finding that they are in over their heads. Meanwhile, lenders are tightening their standards and prices are nose-diving. If somebody wants to escape foreclosure by selling their house, either they can't find a buyer and/or they no longer have the equity to make an arrangement.

Neumeier's numbers show how the problem is widespread. The city of Saginaw leads the way during the past year with 492 foreclosures. However, there were 125 in Saginaw Township, 44 in Thomas Township and 25 in Tittabawassee Township.

"We can see the problem simply by observing that there are more properties that are not kept up," says Tittabawassee Manager Brian Kischnick.  "People walk away and the grass grows high."

 Saginaw Township also illustrates how the mortgage crisis goes beyond low-income families.

Sources have said that up to nine families in the Sawmill development alone have faced foreclosure.

"This will not have any immediate impact on our tax base, but what saddens me is the impact on a lot of good people," says Township Manager Ron Lee.

"A mortgage broker may encourage a family to buy all the house they can, which makes sense. But then they decide to have children, and one drops out of the workplace, and all of a sudden their lifestyle has to change. It can be tough. And then people will feel lower in spirit, and it will cut into their volunteering for different activities in the township.        

"Foreclosures alone won't bring down the economy, but there are the spin-offs. For example, forecasts are for a slow season of holiday shopping. All of this is related."

'Giveaways' in the City
   
Neumeier says an example of the home mortgage crisis is a three-bedroom property with a two-car garage that Neighborhood Renewal owns at 1917 North Oakley on the city's near West Side.

Buyers had paid 13 years on a 20-year mortgage, but then faced foreclosure with only $15,500 still to pay. The property was auctioned at that amount, but no bidders came forward.

Saginaw city assessors have set the State Equalized Value at $31,435, which means in theory that the home should sell at twice that amount, or $62,870.

However, the highest offer that Neighborhood Renewal has received is $11,600.

Neumeier has dropped the posted sales price to $25,000, advertising it as "priced below SEV."  In other words, the home is priced for less than half of the official market value.

"That's hard to imagine, but it shows how bad things have become, and also how so many assessments are out of line," he says.
He predicts that sooner or later, communities will face 'assessment shock' when they are forced to lower assessments and reduce their tax bases.

He acknowledges that Michigan's 13-year-old Proposal A will provide a buffer. Proposal A has limited 'taxable value' increases to the rate of inflation. Therefore, taxable value for many homes is far lower than State Equalized Value. Taxable value will continue to rise annually with inflation, allowing communities to maintain their tax bases.

But at some point, especially in lower-income communities, taxable value will catch up with State Equalized Value. That's when the budget crunches will take root.

A Chance for Tax Justice
     
The Saginaw Board of Realtors reports that the average home sale price declined to $81,000 last September, down from $98,400 in September 2006. This is an 18 percent drop.

Why haven't assessments gone down at the same time?

The reason is that measurement of assessment factors lags behind the sales market, says Jim Totten, Saginaw County equalization director.

For example, 2007 assessments were based on sales data measured from April 2004 through March 2006.

"We're basically a year behind the market," Totten says.  "When we started with April of 2004 for this current year's assessments, we were catching the end of the price increase period. The decline will begin to be reflected with 2008 assessments in many communities."

However, Totten shared an August 2007 memo from the Michigan Department of Treasury's State Tax Division, which outlines a one-year option for any of the county's 30 local governing units to make quicker adjustments.

The state will allow studies measuring the most recent single year, rather than two years, based on a number of distress factors.
Two main scenarios are a reduced number of market sales without a reduction in the number of listings, and/or an increase in the number of foreclosure sales.          

Furthermore, the study period would be moved ahead an added six months. A community shifting to a one-year window for 2008 would base assessments on sales data from October 2006 through September 2007, rather than from April 2005 to March 2007.
Numbers from the one-year period would more accurately reflect the steep price declines, and therefore would result in general with lower assessments.

Totten says he already has advised the City of Saginaw to switch to the one-year study period, and he is consulting with other communities. No matter where you live, you may want to contact your local officials regarding this option.

Lower assessments would not cause Saginaw to lose money for it's regular budget, which is under a tax freeze, but revenue could shrink for millages dedicated to public safety and to trash pickup.

City Manager Darnell Earley says he was not aware of details of the one-year option, but that he will consider the idea.
"We will look at all aspects, and do what is proper so that our assessments reflect parity with any loss of housing values," he says.

Saginaw Township's Ron Lee says he also wishes to learn more about the one-year option. He notes that when a home is sold under Proposal A, the taxable value rises to the State Equalized Value. This discourages home sales.

"When Proposal A was adopted in1994, I don't think anybody expected that the economy would go in the tank in the way as it has done," Lee says.

Meanwhile, Neumeier says that amid all the troubles, he still sees a potential bright spot.

"The Saginaw area continues to offer some of the most affordable housing in the nation," Neumeier says.

"Let's use our affordable housing to attract new residents and new employers who are looking to relocate.'

 "They didn't have to sign"
    
Reaction to the foreclosure outbreak shows a typical split in public opinion. Conservatives generally state that nobody forced buyers to sign up for bad loans with unreasonable terms. Liberals place blame with so-called predatory lenders, or brokers, who have preyed upon good citizens who simply desire to share the American Dream of home ownership.

Eight years ago, Neumeier helped organize a coalition of reputable lenders. They include Citizens Bank, Chase, Chemical, Independent, National City, LaSalle, TCF and Fifth Third. They helped Neighborhood Renewal Services form a mortgage loan pool. At the same time, they conducted workshops on predatory lending with hopes of steering buyers away from the mortgage pitfalls that now have exploded to the surface.

The name of the group is CRA Bankers Forum. "CRA" refers to the Community Investment Act of 1971, a federal initiative to combat discrimination that was known as redlining.

Group Chairman Robert Burgess, a Chemical Bank executive, says the rash for foreclosures is a major challenge.
"Basically, what we have tried to do is promote financial literacy through workshops, focusing on a Saginaw perspective," Burgess says.
 He cites the Bankers Forum's mission and vision statements, which state in part: "This organization will strive to promote and combat the issues related to affordable housing, creating and displaying a unified front as, collectively, we attempt to provide financial support to further the success of our communities."

Success stories exist, such as the Cathedral District surrounding St. Mary's Hospital and the Heritage Square area near the Courthouse, but many other neighborhoods continue to crumble.

Neumeier points to a chart of recorded mortgages in Saginaw County. The total was about 1,000 in 1982. It soared beyond 20,000 just four years ago. On the surface this may seem to illustrate progress and prosperity, but in reality it demonstrates that thousands of families have found a need to enter second mortgages or high-risk first mortgages, many with unfavorable rules.

Jesse Jackson found a point of irony. During the era of redlining, certain people were denied loans. During the era of predatory lending, the same people have received bad loans. Which is worse?

As far as possible solutions, Gov. Jennifer Granholm through the Michigan State Housing Development Authority has announced plans to replace subprime loans with fixed-rate financing, but legislative approval is required and Neumeier says most owners would remain ineligible.        

"What can you do if someone is a full year behind in their mortgage and still in no position to pay?" Neumeier asked. "It's a tragedy, but you can't just give them the house."

Democrats and Republicans agree on one point. Both are pushing for stricter punishments against predatory lenders.

Missing The Fine Print
    
Mary McMath conducts housing counseling for the Saginaw County CAC, short for Community Action Committee, in a project entitled Links to Home Ownership. Funds come from the state housing authority.

"Normally when people go to a closing to buy a house, they are all excited," McMath says.  "Then they have the papers put in front of them, and some don't understand, and they sign. They end up paying 15 percent interest, I've even heard of 24 percent. But think of it: Most all of us have signed papers in which we didn't read all of the fine print."        

Beyond the fine print, she speaks of unexpected financial circumstances. A person may lose a job. A person may take ill, or have a loved one hospitalized.

"I've seen all sorts of situations," she says. "If somebody purchased several years ago, how would they have known that their Consumers Energy bills or their health insurance bills would have such big increases?"

Her counseling goes beyond short chitchats with clients. She conducts workshops that last all day. Topics include budgeting, various forms of mortgage financing, debt ratios, foreclosure prevention, inspections, settlement agreements and purchase agreements.

McMath offers some tips:
1) If your credit rating is low, show some patience and take a few years to clean it up before you try to buy. You will get a much better financing rate.
2) Do not ignore correspondence from your mortgage company. This isn't another credit card company writing and calling; it's your mortgage. Lenders also lose money on foreclosures, and they will want to work out a deal.
3) If you must enter into loss mitigation, go beyond a loan officer and ask to speak with a higher-ranking customer service representative.
4) Also if you enter mitigation, make clear that you are working with a housing counselor.
"I was at a conference, and another counselor said she wished that home-buying advice was part of the high school economics curriculum. That's something to think about," McMath says.
"People don't have to stop buying homes. They just need some education. It's the same as with buying a car. Be careful what you sign."