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This article originally ran in December of 2009, but I’m reposting it because maybe it will be read by someone who will find it even the least bit interesting. The Psychology and Politics of Foreclosure - Mandelman Matters Training personnel to properly interact with those losing homes to foreclosure is not only the right thing to do… it’s also likely to improve a mortgage servicer’s bottom-line. Losing a home to foreclosure is something most people never forget. It’s an event likely to stay with you for the rest of your life. It’s certainly not something most people think will happen to them… until it does. And it can happen to anyone at any stage of life, young, old, rich, poor… all can find themselves at risk. As the off-color colloquialism says about life… stuff happens. Although many people might not readily agree, foreclosures are statistically a “there-but-for-the-grace-of-God-go-I” type of situation. Of course, there are times when more stuff happens to more people, and today is obviously an example of such times. The economic conditions that we’re experiencing today are causing more foreclosures than at any time since the 1930s. When housing prices began to collapse a couple of years back, no one could have seen just how far things would go, and how difficult it would be to bring our economy back to life, as we’ve known it. One of the causalities of our accelerating economic downturn has been a shared understanding of its cause. Some blame our politicians, some blame Wall Street’s bankers, some blame the Federal Reserve, and we’ve all heard that it was the sub-prime borrowers themselves that are the root cause of our recession. Belief in a Just World As human beings, we need to understand the causes behind events that negatively impact our world in order to feel safe. When we don’t understand how or why something happened, when something appears to have been a truly random occurrence, it frightens us terribly because we can’t plan to protect ourselves from such an event. Melvin Lerner is a prominent social psychologist. In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” he argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who are suffering are responsible for their own situations. He conducted a series of experiments and provided empirical evidence showing that after an initial feeling of sympathy, people tend to develop negative views toward others who are suffering. And that’s the type of negative tendency that seems to be in play today. So, perhaps it shouldn’t be surprising that instead of having sympathy for homeowners that are losing their homes to foreclosure, many people are blaming the homeowners themselves for their predicaments. It’s just an example of the general tendency that was documented by Melvin Lerner and other social psychologists many years ago. The Sanctity of Contracts The other factor that comes into play involves the phrase: “sanctity of contracts.” We live in a nation with a capitalist economy that depends on the sanctity of contracts. Our founding fathers put the contract clause into the U.S. Constitution to make clear that people need to live up to the documents they sign. Article I, Section 10 of the U.S. Constitution states: “No state shall pass any law impairing the obligation of contracts.” So, people have the tendency to view those losing homes to foreclosure as not living up to the contracts they’ve signed. They bit off more than they could chew, is a phrase often heard by those who lack sympathy for borrowers in foreclosure. How do these factors manifest themselves in human terms? To understand, picture a line of moving trucks extending for hundreds of miles, taking the furniture of countless families to storage lockers. Picture the schoolchildren saying goodbye to their classmates, leaving the comfort and security of their own bedrooms. Picture the parents sitting up late at night looking through bills trying to figure out how they can save their home, or resigning themselves to the fact that they can’t make it. Picture the arguments, the crying, feelings of loss, of failure… picture the moment when all hope is lost. Picture the day they must leave their home, getting in the car, pulling away from their home, the ones that turn to look back, the ones that force themselves not to look. The radios that aren’t turned on because no one wants to hear music at a time like that. These people you’re picturing aren’t going on vacation, they are being abruptly
moved to the other side of town. They won’t have their own yard to play in. They won’t have their patio to relax on as they watch their children run and play. They’re losing their most prized possession… their home. Yet, it’s also easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. They got themselves into this mess, now they have to pay the price for their own irresponsible actions. The Price Paid by Children Some of the hardest-hit victims of foreclosures are children. According to the Center for Responsible Lending, over the last two years: “Over 1.95 million youth have been affected by foreclosure.” Brenda Jones Harden, Ph.D., wrote that “children exposed to violent, dangerous, and/or highly unstable environments are more likely to experience developmental difficulties.” Children hear more than most parents think they do, so parents’ stress is transferred to their children more than anyone might think. Oftentimes, the kids come to feel that they are both a financial and emotional burden. They can begin making sacrifices for their families, wanting less, eating less. Some children are forced to quit teams they’re on, or stop taking music lessons simply because their parents cannot afford them. Even young children start taking on weekend jobs to help pay the family’s bills. Vacations are cancelled, and other normal childhood comforts are left by the wayside. There are other enduring side effects as well. Being uprooted creates instability in a child’s life. They lose friends, teachers, teammates, social circles, perhaps most importantly, confidence. Being forced to change one’s lifestyle is both difficult and stressful for adults. For children, it can be a nightmare. Children that are displaced by foreclosures often start bringing home lower grades. They exhibit behavior caused by lowered self-esteem. Behavioral issues often become common problems among kids because they feel that they don’t belong in their new setting. Frequently, families that lose their homes can’t afford to move into a neighborhood of equal socio-economic standing. The children can find themselves in new surroundings that may have more crime, inferior school systems, and fewer activities available for youth. The Great Depression of the 1930s changed a generation. Those that lived through those difficult times altered the way they lived the rest of their lives. What will our nation experience a decade from now as a result of the millions of foreclosures our country continues to experience in these difficult times? No one can know the answer to that question, but it seems clear that there will be some discernable impact on segments of our population, and today’s children are certain to pay a price. Exhibiting Anger The crisis we’re experiencing is morphing as it continues, and we can expect continued changes that lead to further problems in our society as the recession lengthens and broadens in scope. One of the factors that’s changing is that the level of anger among foreclosed homeowners certainly appears to be rising, and lenders and mortgage servicers, faced with managing and marketing the volume of foreclosed properties, are increasingly seeing that anger in very tangible terms. According to the National Association of Realtors, foreclosed properties already make up 45% of home sales, and the number is climbing. Home prices have continued to decline at record pace in 2009, and there are no signs of them stabilizing. Further price declines will undoubtedly result in even more foreclosures. Homeowners remain unable to refinance out of unaffordable adjustable rate mortgages (“ARMs”), and as the market continues its decline, more homeowners, realizing that they have little hope of building equity, will choose to walk away from their properties. Homeowners losing homes to foreclosure have started advertising their home’s fixtures on Websites like craigslist.com. Some are stripping their home down to its wiring, destroying its plumbing, tearing out entire kitchens, and even removing roofing tiles. Garage doors are disappearing. Built-in cabinets are gone. Even furnaces and air conditioning units are up for sale by homeowners losing their homes to foreclosure. Recently, the media reported that one homeowner in Monsey, NY, actually leveled his home with a bulldozer just a few days before the property was scheduled to be sold at auction. Of course, not all homeowners experience that level of anger, or if they do, choose not to exhibit their anger in such extreme ways. But the trends are disturbing. More and more often homeowners are damaging their homes before being forced out as a result of foreclosure.
Communities Suffering The large number of foreclosed homes on the market today means hundreds of thousands of homes sitting vacant. And vacant homes are magnets for partying teenagers, drug users, vandalism and crime. Broken windows, smashed plaster, huge holes punched in walls, graffiti on walls throughout the homes, debris, and much worse are becoming more commonplace, as more neighborhoods are seeing more foreclosed homes remain on the market for longer periods of time. Abandoned homes from the foreclosure crisis have a direct impact on the rise in crime in numerous communities. Even when not the result of homeowners or local teenagers, thieves start breaking into these vacant houses, stripping them of valuables, and the destruction of property and vandalism is making the homes even more difficult to sell. Often, as a result, it requires more money to repair these homes than the homes would sell for in today’s market. According to a recent study by Dan Immergluck of the Georgia Institute of Technology in Atlanta, and Geoff Smith of the Woodstock Institute in Chicago, “when the foreclosure rate increases one percentage point, neighborhood violent crime rises nearly 2.5 percent.” A study conducted in Austin, Texas last year, found that “blocks with unsecured buildings had 3.2 times as many drug calls to police, 1.8 times as many calls reporting theft, and twice the number of calls reporting violence as blocks without vacant buildings.” According to a paper on the impact of foreclosures, published by NeighborWorks America: “When homes are abandoned because of foreclosure, entire communities begin to deteriorate. Garbage, unmowed lawns, pests and dilapidated roofs and porches are eyesores. The lack of care can change the entire atmosphere in a community. The people who remain may have feelings of loneliness, fear and frustration. To make matters worse, potential buyers find conditions like these unattractive, turning them away and cause the empty homes to remain on the market for months and even years.” Neighbors Pay Too According to the Center for Responsible Lending, “Foreclosures cost neighbors $223 billion.” The Center also cites that “Over 44 million homes in the United States will experience property devaluation as a result of foreclosures in their neighborhoods. Forty-two counties in the United States can expect to see their property tax base erode by more than $1 billion. And households located in proximity to lost properties could see the value of their property decrease by $5,000, on average.” According to a story in USA Today, Vallejo, California, once a vibrant and flourishing place to live, recently had to declare bankruptcy when the collapsing housing market caused their local economy to go over the edge. “Vallejo cut 87 jobs and slashed funding for parks, a library, a senior citizens’ center and other public services, but it wasn’t enough to hold off the bankruptcy filing.” Unfortunately, social programs and public services are often the first things to be cut from municipal budgets, and seeing the irony in this vicious cycle is unavoidable. The programs that are cut first are often the programs that exist to help those suffering from the crisis that caused the cuts in the first place. Gimme’ Shelter Of course, the question we should all be asking, with so many people losing homes, is where is everyone moving to? According to the National Coalition for the Homeless: • 76% of displaced homeowners and renters are moving in with relatives and friends. • 54% move to emergency shelters at some point. • 40% are already ending up on the streets. • 61% of state and local homeless coalitions say they’ve seen a rise in homelessness since the foreclosure crisis began in 2007. Of course, many homeowners that lose their homes to foreclosure ultimately become renters, and the increasing demand for rentals has, quite predictably, led to rising prices. So, not only do foreclosure victims have a tough time qualifying for rental housing due to their damaged credit scores, but many are being priced out of the market as well. And that’s not the end of the rental story. Foreclosures are affecting renters too. Many of the foreclosed properties nationwide are apartment unit buildings. According to the Furman Center: “60% of the 15,000 foreclosure filings in New York City last year were on multi-unit buildings.” And the result is families forced
out of their apartments often with very little notice. According to the National Low Income Housing Coalition, “In the State of Nevada alone, 5,000 families have been evicted from their rental homes in the last 18 months.” The coalition also reports that in suburban Los Angeles, a tent city of more than 200 displaced residents has emerged. Notoriously high rent payments in the LA basin are leaving many with no other option than to pitch a tent or live out of their car in settlements like this. At this settlement there is no electricity, no plumbing and no drainage. There is nowhere to properly store food. Clearly, the lack of plumbing and refrigeration poses serious health risks to the residents of this makeshift community. Homeowners Attitudes About Banks Worsening Lenders, mortgage servicers, hedge funds, and various real estate investors are all more than aware of the crisis and its ramifications. Yet, distressed homeowners continue to report their frustration and anger over the way they are treated by their bank. And for banks and mortgage servicers wondering about the outcome of this increasing homeowner dissatisfaction… well, the writing is on the wall. In a November 2008 story, published by the Oakland Tribune (Oakland, California), customers of Countrywide, Wachovia, and Wells Fargo, among others, describe the banks as uncooperative, ineffective and rude. “Countrywide says it wants to help people restructure? That’s baloney,” said Dawn Aguiar, who bought her Fremont home for $587,000 in 2005. “They have not been helpful at all.” She financed the purchase with a $586,000 mortgage from Countrywide, but homes in her neighborhood now sell for $450,000 to $500,000, so her house is “under water” – worth less than the loan. Her adjustable rate loan balance increases monthly, and she’s behind in her payments. “One lady I spoke to was so rude, she had a real attitude,” Aguiar said. “She talked down to me like I was a deadbeat.” The complaints from homeowners at risk of foreclosure about rude treatment by bank personnel are mounting in number and visibility. A quick check online yielded the following: Mark Gagliardi about Countrywide: “They’re not proactive. No calls, no follow-ups. And when I call them, I get put on ignore.” Sue Chai Spaulding about Bank of America: “They don’t want to help you. But they shouldn’t take this so lightly. These are people’s lives. They have been rude to me.” Rachelle Gonzales about American Home Mortgage: “It’s so frustrating. They say they’ll help. Then they say no. They have called me names. They have called me a slime. This has been awful. Just awful.” On one Website discussion about homeowners losing homes to foreclosure, the following discussion thread was easily found: The first comment said: “The best way to ruin a house beyond repair is this… Get yourself a couple of bags of cement and mix a lot of water to make it a bit light… Drop it down every open pipe in your house (sink, toilet, bathtub, sewer pipes, main water pipe) then let it set. The repair will cost the bank more than the house… replacing every pipe in the house means they have to redo the house. They might be able to charge you tho… ha, ha.” To which another replied: “Awww… the poor banks. Whatever will they do? Ain’t karma a bitch?” And then another added: Yes they could, but, what can they get out of you when you have nothing to lose? Remember kids, fire cleanses everything. And then another: “Great point. I hate banksters.” And another: “Payback’s a bitch.” And then another: “I think this is funny as hell. Everyone getting evicted should take all they want, then burn the place down.” And another: “The bank may own the house but not the appliances! Of course they should take them – they are theirs. I can find NO sympathy in my heart for bankers or real estate agents – they’re right up there with tax collectors.” And then another: “If the lender makes things hard, they get to live with the consequences. That house will be torn to shreds.” And lastly: “If you ask for peace, prepare for war.” The Cost of Foreclosing
The costs involved in foreclosing on a home are high and getting higher. Lost principal and interest payments, tax and insurance payments, maintaining the property, lost servicing fee income, costs of collection efforts/servicing, legal costs for handling the foreclosure, administrative fees, costs of restoring the property to saleable condition, real estate commissions… all play a role in negatively impacting a lender’s bottom-line. According to estimates from Standard & Poor’s, published in 2008, the average cost to a lender, expressed as a percentage of the loan balance is 26%. The costs breakdown as follows: Amount lost in interest payments: 13.6% Property taxes paid by lender: 3% Legal fees paid by lender: 1% Real estate agent commissions: 6% Home maintenance: 3% With the housing crisis still in full swing, home prices still not at bottom, and many forecasting millions of foreclosures still to come, it’s clear that lenders will endure more pain over the next few years. What banks and servicers need to consider is how homeowner attitudes are likely to change for the worse as the crisis continues. Our politicians have recently started to see how populist anger can make governing much more difficult. The outrage over the AIG bonuses provided an example of how close many of our nation’s citizens are to marching in the streets. One can only imagine how homeowners will feel a year or two from now, when many of those who thought they could make it through our economic downturn, find that they have not. No one can know for sure, but one thing seems certain: If they’re getting angry today, they’ll be that much angrier a year from now. Loan Modifications As the economy has deteriorated, the number of foreclosures has continued to increase, which places further downward pressure on home values, which in turn causes more foreclosures and does further harm to our economy. Today, we all realize that foreclosures benefit no one, although to-date, we have not united behind a solution to this very serious ongoing problem. As a result of this dangerous, downward spiral, the cost of foreclosure in some parts of the country is reaching the level at which no one, including the investors that own the property, wants to foreclose. One alternative is loan modification. If, by modifying the terms of an existing mortgage, the borrower can afford the mortgage payments and therefore remain in the home and avoid foreclosure, it’s often true that everyone, even the investors that hold the mortgage on the property, comes out ahead. For investors, it’s really a question of which alternative, foreclosure or modification, offers the greater financial return. There are several methods for determining the cost differential between the two alternatives, for example one could compare a present value calculation with the expected cost of foreclosure, factoring in variables like repairs and reconditioning, expected time on the market, and assumptions about trends in home prices. It’s worth considering, however, that lenders and servicers continue to struggle with loan modifications, which are transactions that are particularly time and labor intensive and often produce unsustainable results. As an example, studies published last year indicate that when banks attempt to handle loan modification negotiations directly with a borrower, the end result is that 60% are back in default in six months. The reasons for this are many, but the overriding fact is that negotiations between a bank and an individual homeowner at risk of foreclosure, are obviously not negotiations between equals, and that manifests itself in high re-default rates in the first year. By contracting with qualified and quality loan modification firms, banks may be able to increase the diameter of the pipeline and therefore modify more loans, keeping people in their homes where they’re supposed to be. Cash for Keys A number of lenders have adopted the practice of offering to pay a homeowner about to lose a home to foreclosure a cash payment for leaving the home undamaged. Lenders report offering payments of $1500$3,000. But with the incidence of borrowers damaging their homes before they leave rising, offering three grand may only be keeping the already honest… honest. For those angry enough to strip wiring out of a home, remove a garage door, or even sell the air conditioning unit, three thousand dollars is not likely to accomplish much. The Best Way to Catch Flies
Lenders seeking to reduce their costs of foreclosures should consider the old axiom: You catch more flies with honey than you do with vinegar. As it relates to a lender’s loss mitigation and collection personnel, it means that training them to better understand the psychology of foreclosures, to feel more empathy for those losing homes, to identify with a parent with children in financial distress… and more… banks can expect to be repaid hundreds of times over. People in foreclosure, and those at risk of going into foreclosure, are often scared, lonely, tired, insecure, and sometimes confused. They’re not thinking clearly and they’re on the edge. A little kindness at a time like that can go a long, long way. A little rudeness, on the other hand, can push someone into a rage. It’s not easy to work with distressed homeowners day after day. And even though some might feel like they’re not letting their true feelings come through, at times like these, that can be difficult, if not impossible to do. Here are some ideas that I think bank management could consider to change the way their personnel behave toward distressed borrowers. 1. Explain what distressed borrowers are thinking and how they are feeling. Give them the details. Ask them to imagine what they would do and how they would feel. By bringing them into this kind of discussion, you’ll force people to realize that others worry about the same things they do, and once they share their thoughts and feelings with co-workers, they’ll stop seeing those in trouble as getting what they deserve. 2. Share the facts about the costs that neighborhoods, communities and society as a whole pay as a result of foreclosures. You can use some of the statistics presented earlier. People sometimes fail to see how something that hasn’t happened to them personally, affects everyone personally. 3. Play the Foreclosure Game – Ask people to calculate what would have to happen to place them at risk of losing their homes to foreclosure. You can even create cards that describe various catastrophes that happen to people in life. For example: You are injured in a car accident that leaves you unable to work for three months; the driver that hit you is uninsured. A month later your spouse is laid off from work, and you have a tuition payment of $18,000 due in 90 days. You can’t take out an equity line on your home, nor can you borrow from the bank. And your retirement plan account has been reduced by 40% as a result of the latest market correction. 4. Consider asking a borrower who already lost his or her home to foreclosure to come in as a guest speaker. Often times, it’s harder to harbor ill feelings about someone you’ve met face-to-face, and the personnel stories from people who have come through it, can have a lot of impact. 5. Conduct role-playing exercises in which one person is the borrower and the other the bank manager. The borrower starts by explaining to the bank manager how they got in so much trouble. The rest of the group votes on the level of empathy and compassion the bank manager has communicated during the call. 6. Review your personnel training manuals to ensure that they are not placing counterproductive restrictions or using guidelines that make it more difficult for your people to spend the time needed. For example, do your people try to spend less than a certain amount of time per call? If the answer is yes, you may want to consider either lifting that requirement, or lengthening it. 7. Changing culture has to start at the top. Have all of your organization’s top managers speak at your training sessions. When your loss mitigation personnel hear the CEO talk about foreclosure victims with sympathy and caring… they’ll stop and listen. 8. Clip and distribute articles that highlight the heartbreaking stories of people losing homes due to no fault of their own. Many people today, still have the impression that those that got in trouble did it to themselves. Show data on the number of prime loans that are now defaulting. Examples that destroy that perception help to open minds. 9. Encourage your people to share stories with each other at regular meetings. This is not something you want to do just once and leave it alone after that. This is an ongoing program intended to make sure that the people you have on the phone aren’t causing someone to punch holes in their walls when they hang up from the call.
10. Consider increasing the number of breaks your people take during the day. And consider providing some items “just for fun” in areas where breaks are taken. An Etch-a-Sketch, Slinky, or even Play-Doh, can all bring back happy memories and help to relieve stress, or on the more serious side, provide an exercise ball, weights, or even a treadmill or two… exercise kills stress. Conclusion Human beings have a need to see bad things that happen to someone as not being their problem. And because of how this crisis has unfolded, many people have come to believe that everyone losing a home is an “irresponsible sub-prime borrower”. This belief can color how someone interacts with a distressed homeowner. Those losing homes today are going through very stressful times. Many have lost jobs, and are struggling to make ends meet. Many have young children. And many have lost all hope. It’s easy for someone under that kind of stress to become angry, and an angry homeowner losing a home to foreclosure is likely to damage the home before leaving. Banks and servicers need to take a look at how loss mitigation personnel are trained to deal with homeowners at risk of foreclosure, because as the months and even years go by, the situation will only get worse. By helping personnel to better understand what’s happening and how these customers are feeling, they can spend a little extra time, or offer a kind word that can make the difference between a home left in decent condition, and one in need of thousands of dollars in repairs. Most importantly, communicate with the people that interact with troubled borrowers on the phone every day. It’s a hard job and constant exposure to tragic situations and frustrated or angry customers can wear one down, even if the person doesn’t realize it. Today, just like my mother used to say… It pays to be nice. Mandelman out.
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