San Antonio Express News
Texas leads the nation in total home foreclosures
03/13/2005
Adolfo Pesquera
Express-News Business Writer 
Texas has earned bragging rights in a dubious arena: Homeowners went to foreclosure in 2004 in total numbers that far exceeded any other state.

While the state was laying claim to No. 1, Bexar County had more residential foreclosures in December than California, West Virginia, Montana and Hawaii combined.

The 802 Bexar residential listings were part of 9,928 total foreclosures in Texas for the Christmas month, according to Florida-based Foreclosure.com. That represented almost 12 percent of all foreclosures in the nation.

"The foreclosure rate is a kind of collateral damage from the effort to raise the homeownership rate," said Jack Harris, a research economist with the Texas A&M University Real Estate Center. "There's been a concerted effort by government to raise the homeownership rate. But they throw a wide net and get a lot of people that probably aren't ready for homeownership."

The homeownership rate in Texas hit bottom in 1990, at 47th out of 50 states and the District of Columbia. Texas ranks 45th today, but has been stuck there for more than five years.

"I'm not sure we ever really uncovered why Texas was low," Harris said.

Studies that prioritize the causes of foreclosure in Texas are lacking, and experts are far from devising any master plan to address the many issues that cause it. But there is some sense as to what the main problems are.

Lending practices — Federal Housing Administration loans that are too easy to get, subprime loans that come with conditions too burdensome for borrowers and questionable appraisals that inflate some loans, making them impossible to unload in times of personal crisis.

Nonjudicial foreclosures — Texas has one of the quickest procedures for disposing of delinquent mortgages, a fast-track administrative process that easily circumvents the state courts.

Property Appreciation — Land in Texas, as is the case with much of the Midwest, appreciates slowly, making it difficult to sell if the loan has not had time to mature and provide the holder with some equity.

Regional economies and personal misfortune — Job layoffs, divorce and serious illness or injury are the reasons most often cited by mortgage bankers and the Housing and Urban Development Department.

Though Texas is far out front of the other states in gross numbers, it isn't the worst state on a per-capita basis. Texas was ranked 41st by Foreclosure.com, but last place fell to Indiana. Realtors there asked the National Association of Realtors to study why.

Many of Indiana's circumstances didn't apply to Texas, but two did: the prevalence of FHA loans and the appreciation rate.

"Coincidentally ... the Indiana foreclosure rate began to noticeably deviate from the national rate at the same time that FHA-backed loans increased in Indiana," a 2003 NAR report noted.

The Indiana report noted Texans were 14th-highest in their reliance on FHA loans.

FHA loans are the riskiest on the market. The Mortgage Bankers Association reported these loans had a national delinquency rate in the last year's third quarter of 12.22 percent, higher than the 10.39 percent rate for subprime loans.

The most recent Bexar foreclosure numbers also show a disproportionate presence of FHA loans. Real Estate Foreclosures Inc. reported 36 percent of the January loans in foreclosure were FHA. For February, it was 32 percent.

David Rose, a director with the Chicago-based National Training & Information Center, led a campaign that brought some FHA reform. Appraisers who notice a defect with a house, Rose said, must now inform the homeowner of this.

Critics of the appraisal process, be it with an FHA or some other loan, contend it is a significant factor.

Bonnie Brown, a spokeswoman for Foreclosure Listing Service Inc., noted that 16 percent of the Bexar loans in the fourth-quarter foreclosure listings had loan amounts higher than assessed value.

"The average age of these, what I call 'upside-down' loans, is 2 years," Brown said.

That matters to investors who subscribe to Brown's services, because such loans aren't worth pursuing. Bexar residents caught in foreclosure put almost $840 million in assessed property value at risk. About 35 percent of that value actually went to auction. Most of the remaining properties were diverted through distress sales, bankruptcy or forbearance agreements with lenders that give the homeowner a limited time to catch up.

Whether a house is diverted from foreclosure through bankruptcy or a forbearance agreement, this is frequently a temporary delay. Many of the properties go back to foreclosure within 18 months.

About 89 percent of properties at auction went back to the banks, Brown said.

Melissa Abel, government affairs director with the Indiana Association of Realtors, said concern about the state's foreclosure rate led to enactment of reforms.

One Indiana law tightened lending practices. Another reform created a division at the Indiana attorney general's office to provide enforcement procedures for deceptive mortgages.

Texas' attorney general has no such mandate.

James T. McMillen, a Corpus Christi consumer law attorney, said he would prefer to operate in a state that had a judicial foreclosure process. Only home equity loans, he said, go through a judicial process.

"Bankruptcy is an alternative, but it wouldn't be my first choice," McMillen said, emphasizing that homeowners with issues concerning predatory lenders or loan servicers should first try to find a consumer law specialist.

But time is critical in Texas.

"You're looking at about 60 days from start, when you get the demand letter, to finish," McMillen said. "They need to start looking for a lawyer as early as they can."

Organizations with the expertise to intercede between homeowners and lenders are few and limited to taking low-income qualifying clients. Some nonprofit housing organizations provide this help to clients who have bought houses through their programs.

Research economist Harris said FHA and Fannie Mae justified the loosening of standards for making loans by requiring everyone to get counseling. How well this will work is mostly a guess, he added.

Roberto Quercia, a University of North Carolina-Chapel Hill associate professor and expert on housing counseling programs, said the counseling industry is widespread but there is no research that proves it makes low-income borrowers less likely to default.

In situations in which there is already a signed contract, as is usually the case in the purchase of a new house, the counseling mandated by the lender can be moot. Many homebuilders own the mortgage company that most of their sales applications go through.

"What you learn in counseling helps you decide, first, whether you are ready for homeownership," Quercia said. "Then you decide what to buy, how large a house you can afford. Those benefits are missed if you're already committed to buy a particular home."

As loose as the standards have become, the Bush administration is trying to make it easier still to get an FHA loan. FHA mortgages now require at least a 3 percent down payment, something often circumvented through gift down payments provided by nonprofit groups.

Bush asked Congress last year to remove the 3 percent requirement in the Zero Downpayment Act. It failed, but is expected to resurface this session.

The Congressional Budget Office estimates FHA mortgage insurance claims would exceed premiums by $500 million in the first four years of such a program, a shortfall that would probably be covered by taxpayers.

One opponent is U.S. Rep. Ron Paul, R-Surfside Beach.

"Congressman Paul simply does not agree that it is one taxpayer's job to provide a more affordable mortgage for another taxpayer," said Jeff Deist, Paul's spokesman. "People tout it as helping the poor. The flip side is the poor pay taxes, too.

"You don't do any favors," Deist said, "by getting people into houses that they're going to lose a few yearsl ater."  http://www.mysanantonio.com/business/stories/MYSA031305.1R.Foreclosures.125edd4eb.html