There are multiple causes of the foreclosures which have contributed to the huge number of disrupted lives and vacant buildings in Indianapolis and other cites throughout the state. It is reasonable that we should spend some time trying to analyze the causes. It is, however, imperative that we not spend too much time on the analyzing before we get to the critical task of trying to determine some actions to intercede in the cases where it is possible to avoid impending foreclosures and take preventive actions, as needed, to minimize situations which are likely to lead to additional foreclosures.

Recent stories in the Indianapolis Star have focused on the problem created by vacant buildings, the “new” down payment assistance program to be implemented by HUD to provide funds for borrowers at 80% of the local median income. I was particularly intrigued by the story of a class action lawsuit against local builder Arbor Homes. Their down payment assistance program allows borrowers who have not saved money to use a “gift” equal to 3% of the purchase price of the home from the ONE or Nehemiah programs to cover their down payment. The suit alleges that the “gift” is in fact rolled into the borrower’s new mortgage along with the administrative fee that is charged to the seller/builder for participating in either of these programs. In essence, the buyer has not only borrowed all of the funds for the home but had an extra charge added as well. Arbor has responded that this is common practice among builders.

Unfortunately, it is, in fact, common practice in most of the down payment assistance programs. It is also a major contributing factor to the significant number of consumers who are losing their homes to foreclosures within 2-4 years after they have built. Mortgaging more than 100% of the value of the property from the beginning, utilizing a variable rate or 2-1 buydown to minimize initial mortgage payments and starting with an amount in the tax escrow account which is insufficient to cover the anticipated tax bill at the end of 2 years when the taxes are fully assessed is a recipe for financial disaster and likely foreclosure. It is no wonder that our newer subdivisions have become riddled with vacant buildings and broken dreams since the introduction of these “gift” programs in 1999. If we continue to attribute the increased foreclosures predominately to the economy (that is a factor) while overlooking the stark evidence that other factors are at work here, we are allowing the problems to worsen while our collective heads are in the sand.

We have the problem of the emotional impact of those consumers who are left in the subdivision feeling discouraged because of what is happening in the neighborhood they call home. Home is no longer a haven when you drive past 6-8-10 vacant buildings to get to your house. High weeds and a sense that something is very wrong diminishes your spirits and discourages you from wanting to mow the lawn and put out fresh flowers when there are several yards on the block where there is no homeowner to handle even minimum upkeep. Numerous For sale signs, rent-to-own and lease option signs are now common in a neighborhood which is only 4 years old. Golden Feather Warning signs indicate another property which belongs to HUD. Those homes that are re-selling as foreclosures are selling at 10% up to 20% less than what they sold for as new homes. Property values are seriously impacted for both the remaining residents as well as those who have been forced to leave. Surrounding communities, which had enjoyed stable values for years, are now being devalued because of the drastic reduction in values in this newer subdivision.

Home owner associations funds are stretched and needed work cannot be completed because so many of the area residents can not afford to pay their dues, since their house payments increased after the 1^st and 2^nd year. It is an example of the spiraling effect of the financing tools used during the past 5 years to qualify consumers who are marginally ready to own a home, are not educated about the true cost of home ownership and have little or no reserves.

Few of the consumers leaving newer construction subdivisions are leaving because of job loss or displacement. They had what I call “funny financing” resulting in a mortgage payment that was artificially low from the beginning but grew to elephant size at the end of 2 years and swallowed the house.

They feel lucky to have escaped, even with ruined credit.

We have created a mechanism to skirt the need for consumers to save money for the down payment on a home. It allows all of us to feel that we have “solved the problem so everyone is now able to get into the American Dream”. We now must solve the problem of “the aftermath of a Housing Nightmare.” We can’t do that if we continue to point the finger of responsibility at the economy.

Perhaps the Arbor lawsuit will cause us to reevaluate how new construction is financed and at what cost—to the consumer, the surrounding neighborhood and the community at large. The economic stability of our state is at risk. We must stop the foreclosures.

If there is a particular subject you would like to see explored, please contact Ms. Wilkins via email: mildredwilkins@homeownershipmatters.com.