Back in mid-2006, nearly a year before I launched ForeclosureRadar.com, I wrote an article for iTulip.com to help Eric's readers better understand current foreclosure statistics. In it, I introduced the fact that there is a base rate of foreclosure that happens regardless of the housing market. This base rate of foreclosure being due to the Five D's: Death, Disease, Drugs, Divorce, Denial.
From the time I started buying foreclosures, through writing that article in mid-2006, the housing market was booming. Selling most homes was easy, and anyone with a pulse could get a loan (one lender actually went as far as to advertise a "pulse loan"). In this environment, many found it hard to believe that foreclosures even occurred. I initially struggled to make sense of it myself. Why would there ever be homes with tens or even hundreds of thousands in equity being sold at the foreclosure steps? Building this list bridged that gap for me. While the Five D's now represent a small percentage of the foreclosures that we see, I still feel it is an important part of the larger story.
I've wrestled a bit with whether this list is right or not over the years. Some have argued that drug use is a disease, or that denial is a cop-out/catch-all. I had even added a 6th at one point, Duty, as our service members began losing their homes while serving in Iraq. I've since dropped Duty as part of the base rate, as I sincerely hope that it is a temporary problem that will not continue. After all the arguments, this is the list that continues to stick. Let's take a quick look at each:
Death: Turns out some folks die with a mortgage and no heir. Others fail to prepare, and while their heirs fight over who gets what, no one pays the bills. There are any number of variations on these basic themes - but it happens. Every once in a while, I'll see a 25 year old first mortgage with a tiny balance go to foreclosure. Some investors assume it is a 2nd due to the low balance and their failure to notice the loan date. Mostly these tend to remind me of the importance of friends and family, and of keeping my own will in order.
Disease: No one should underestimate how debilitating getting sick can be. When you're fighting for your health, nothing else seems to matter. It often has significant impacts on income, as well as the ability to cope with the stress of major financial issues like having to sell your home. Shortly after our son was born, my wife's back went out; two back surgeries later she was beginning to recover, when our son was diagnosed with juvenile rheumatoid arthritis. Had I still been working in tech at the time, I have no idea how we would have managed. Fortunately, my foreclosure business and our past savings provided the flexibility and income we needed to get through (everyone is doing GREAT now by the way). Many are not so fortunate. Some may argue that foreclosure shouldn't happen in these cases - but understand that someone still has to pay, so unless you're ready to either pay higher mortgage rates, or higher taxes to provide for folks in this situation, foreclosure will remain a common outcome.
Drugs: My favorite example here is a guy that had $200k of equity, yet stopped making payments on his house to get his girlfriend cosmetic surgery. He could have sold the house. He could have gotten a home equity line. He could have found a different girlfriend. :-) Instead he lost his house. Given the dazed look, paraphernalia, and complete lack of ability to reason, the only thing that surprised me here was that he was a framer - a particularly difficult construction job that involves walking on unfinished roofs with circular saws and a hammer. Apparently the drug use didn't affect his sense of balance in the same way it affected his judgement.
Divorce: We once had a women show up at the courthouse steps to show the auctioneer a court order which clearly stated that her husband had to make the payments on the house. After a quick call to the attorney handling the file for the bank, the auctioneer calmly replied "he didn't" and proceeded to sell the house. It boggles my mind to think about what now must be billions of dollars that have been lost fighting in divorce. Ed McMahon actually recently stated it as one the reasons behind his own foreclosure. Fortunately I have not been through it, so I won't pretend to know how hard it is. I do expect it will continue to provide profits for attorneys and foreclosure investors for many years to come.
Denial: This one is the most difficult to explain, but I can't tell you the number of times I've met homeowners that were simply in complete denial of their present situation. This can continue all the way through the foreclosure and into the eviction. We even had one couple move back into the house in the night after the Sheriff had physically removed them earlier in the day. When the Sheriff came back the next day, they calmly explained they would continue moving back into "their" house and there was nothing anyone could do about it. Spending a night in a holding cell and some family intervention finally resolved it, though they likely still believe it is their house.
Now let me be clear that these are NOT the only reasons that foreclosures happen - these instead are the most likely causes when the market is strong and the owner has plenty of equity. They occur regardless of the housing market or economy. They are the base rate of foreclosure.