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The Problem of Foreclosures

June 13, 2007

Yesterday, I attended a Foreclosure Summit sponsored by the Federal Reserve Bank of Dallas. The summit was entitled, “Preserving Homeownership: Addressing the Foreclosure Issue” and it provided a lot of good information.

Foreclosure and mortgage fraud are two separate issues — both of which are a concern to cities. The truth is that most foreclosures occur without any fraud. Changes in employment, personal issues or a change in the economy all contribute to foreclosures.

The widespread use of adjustable rate mortgages (ARMs) have also contributed in recent year. It is almost becoming an epidemic and it is not limited to Texas.

Some of these ARMs are obtained through the builders of the house. Related entities — the contractor, mortgage broker, appraiser — work together to sell houses. All are motivated to sell homes, not necessarily look out for the buyer. Along the way, the home buyer is not told the true cost of the home, the consequences of a change in the interest rate or given an accurate assessment of the amount of taxes levied on the home.

These factors working together can cause dramatic swings in the monthly mortgage payment.

Last night, the City Council took steps to address part of the issue. We passed a ordinance requiring general contractor registration. Before a general contractor can build a home or commercial building, the company must go through a permitting process. During this process, the city will look at other projects the contractor has built.

We will look for red flags like:

  • abandoned projects
  • allowing occupancy before a certificate of occupation has been issued
  • failing to get the necessary permits
  • prior violations of the building code
  • substandard work

If these conditions exist, we can deny, suspend or revoke a contractor’s permit.

Of course, this issue goes beyond the foreclosures. Declining property values and unsightly (and unfinished homes) homes in a neighborhood are raise concern. Hopefully, this ordinance will help.

The city will not — and cannot — take the place of informed home buyers. Citizens should use diligence when selecting a builder and when considering the financial method. But at least this gives the city additional tools to stop unscrupulous or poorly financed contractors.

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