The housing and mortgage crisis has reached such epic proportions that its impact can even be felt in the temporary housing business. To see how this domino effect is sending ripples throughout all markets and trickling down to the temporary housing category, we should first look at the final 2008 foreclosure statistics, which tell us that there is no slowdown to the housing meltdown in sight.
In 2007 before the meltdown, the housing industry experienced a 75-percent increase in the number of foreclosures year over year, with just 10.3 of every 1,000 homes affected. In 2008, however, all of that changed as foreclosure increases continued to escalate.
Congress has taken measures to slow the increase. For instance, it has passed new laws to extend the foreclosure process, loan modifications programs, and holiday foreclosure moratoriums. However, there are still several indicators that this crisis continues. The Mortgage Bankers Association has observed a 7-percent increase in delinquencies on loans that are not yet in foreclosure. In addition, more than half the homeowners who received loan modifications to reduce monthly payments in the first half of the 2008 are again delinquent, according to the U.S. Office of Thrift Supervision.
Rick Sharga, senior vice president of Realty Trac, a leading online foreclosure expert, expressed surprise at the December increases. Sharga said he expects they will continue into 2009, noting that one in every 54 homes received a foreclosure notice during the past year.
Even with all the moratoriums and mortgage relief being offered by the government, this past December was a record month for foreclosures. There was a 17-percent increase compared to November and a staggering 41-percent increase over just one year before.
In total, 2008 foreclosures were up 81 percent compared to that of 2007, and 225 percent over 2006. Geography and demographics played a factor in the statistics. Nevada, Florida, and Arizona led the states in terms of the number of foreclosures, with Nevada topping the list with its 125 percent over 2007.
So what does all this mean to the temporary housing market and an adjuster's ability to deliver quality service to the policyholder? What does this mean exactly? Well, policyholders may find themselves in tenuous circumstances where the literal rug may be pulled out from under them by a foreclosure any day. Now former homeowners are renters or 'would-be' renters. Those trying to rent or find temporary accommodations because of real disasters may find the equivalent of queuing lines to secure a new space to live.
A Call to Arms
The economic crisis is impacting everything from the cost of staples and cars to our 401k statements — not to mention the rise and fall of the dollar. Moreover, the resultant housing crisis is creating an additional burden for policyholders in need of temporary housing. This climate clearly calls for increased mitigation efforts by adjusters, as the crisis may very well impact an adjuster's delivery of services to the policyholder in the following three ways:
1. Desperation breeds a new threat of arson.
While insurance carriers have always battled insurance fraud, a new threat has emerged in these extraordinary times. There is an ongoing trend of destruction of property as a last resort.
David Rioux, vice president at Corporate Security Department and Investigative Services for Erie Insurance, coined the phrase "desperado" in a recent Claims article. He said, "The industry may be facing a new profile: the desperado. [This person] could be a friend, relative, neighbor, or co-worker who is acting out of desperation rather than greed. This type of perpetrator sees himself/herself as a victim of misfortune."
A desperado may think that torching his or her home is the only way out. While there are no solid statistics linking arson rates to the economy and foreclosures, anecdotal evidence abounds.
"One example is a gentleman in northwest Pennsylvania with a suspicious home fire," Rioux says when referring to the plight of one desperado. "Despite a checkered credit history, the homeowner was able to eventually secure refinancing last year with an ARM mortgage at an attractive 6.5 percent rate. Prior to the fire, the homeowner was notified of a rate change to 15.5 percent…."
In this example, the homeowner effectively doubled his payment and it put him in the desperado category. Many of us have heard similar tales from carriers across the country and now see arson investigation on the rise. As housing providers, we observe how this increase in desperation causes policyholders to have to wait longer — perhaps sitting in a hotel — for the outcome of the investigation before moving to temporary housing.
2. Even though the availability of housing options is high, proceed with caution.
On the bright side, there are more cost-effective housing offerings because of the increased inventory. This competitive rental market, at all price points, means translates to ample availability of properties. In addition, the revenue to a landlord from temporary housing could prevent a foreclosure.
But even in the midst of bright news, one should be cautious. Because homeowners are now staying in apartments, the apartment waiting list is filling up. This causes current policyholders in apartments to be "kicked out" if their stay is extended because there is someone new slated to occupy the property. Thus, it is critical to have a housing vendor that manages the process for the entire stay.
3. The curse of the 20-percent rule persists.
Chip Cummings, author of Mortgage Myths, says that more than 20 percent of all foreclosures are rental properties. This means that two out of 10 of your policyholders already in temporary housing could be at high risk of having their rental foreclosed upon.
When a foreclosure takes place, the tenants in the property have little or no rights. Generally these rights vary by state. The bottom line is this: the property owner can evict a tenant within a matter of days, despite the fact that these same tenants have a contract in place with the former landlord to pay rent according to the terms of the lease. Trusting tenants have no idea if (or when) they may receive an eviction notice from the landlord's bank.
Devising a Preemptive Plan
With all of the uncontrolled chaos in the economy around us, are there measures that the industry and adjusters can put in place to mitigate the risk of a foreclosure to their policyholders? Adjusters need to ponder these questions:
? What can I do for a policyholder who has been asked to vacate his temporary home?
? How can I mitigate the added effort in locating another temporary home for that person?
? What additional expenses will be associated with moving again, including perhaps additional security deposits?
? What should a policyholder do when he has lost a security deposit to a landlord that is in now defaulting or to one that has unscrupulously spent the security deposit on other things?
? What advice can you offer a policyholder who comes to you because the house he was renting is now under foreclosure? Do you suggest he move out? What about his credit? Do you buy the lease out?
There are no foolproof methods to prevent a rental home from going through foreclosure. Ignoring considerations in today's market conditions, however, can harm your policyholders. All adjusters are concerned with customer satisfaction. Remember that nothing can "freak out" an already distraught policyholder more than finding a foreclosure notice posted on the door. So be certain to ask your housing vendor about programs in place for situations facing policyholders in today's shaky market. They need to ask the right landlords the right questions in order to mitigate your risk.
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