Interview with Herbert Addison, JD, CHC,- Foreclosure Guru

Here’s an informative Q&A session with Herbert Addison, JD, CHC conducted on April 6, 2006 on behalf of the Financial Literacy Institute concerning the growing foreclosure problem for tens of thousands of homeowners.

FLI: Experts have predicted that the number of homes in foreclosure may reach 1 million by 2007. Why is this happening?

Addison: The dynamics of borrowers in foreclosure is changing. Three years ago the majority of foreclosures were the result of a loss of income due to job loss or illness. Now we are seeing middle and upper class homeowners with adjustable rate mortgages and interest only loans falling prey to increasing interest rates. Higher gas prices and utility costs, or should I say; the failure of consumers to recognize and properly manage these domestic-overhead expenses, are now accounting for the explosion in home foreclosures.

FLI: In 2004 you were the key note speaker for ABN-AMRO and presented the premise that domestic overhead was the key to effective loss mitigation management. Could you explain your use of this term?

Addison: Domestic overhead refers to the costs of running your household. During a study of 1800 cases, we noticed financial hardship was closely related to the fluctuation in gas prices, child-care expenses, utility costs, vehicle maintenance, and deferred home maintenance. The traditional position in housing counseling is that the mortgage is the most important bill in the home and that a responsible person would pay the mortgage before anything else. However, this did not take into account the "cost of employment" which involves a person’s ability to work.

For example, if you have to choose between paying the mortgage, day care, and an electrical bill, our research found that almost 100% of the homeowners would pay the electrical bill and daycare first. Intake questions were added to explain this priority in bill paying and the answer was that daycare was essential to being able to go to work on time and to secure employment. If they lost their job then the loss of the home to foreclosure was be guaranteed. The same is true for the reaction to higher gas prices. The car had to be maintained at all costs, including insurance and car payments, because if they did not show up to work on time, there would be no income to pay any bills. This made sense and so we created a new spending plan model that better manages domestic overhead.

FLI: Now are you saying that the borrower should not pay the mortgage first?

Addison: Absolutely not. I am saying that a very important factor in budgeting is the cost of maintaining employment. Many homeowners do not recognize that they are in trouble because they do not take the time to manage these costs and adjust their spending habits accordingly. If it costs an extra $200 per month just to get back and forth to work, then your cash flow will be strained. Remember, when gas prices increase, the cost of electricity to your home also increases yet your weekly take home pay remains the same. I am saying that the mortgage is not paid because the money is not available, no matter how badly the homeowner would like to pay the mortgage on time. I am saying that when there are limited funds and a choice of paying the mortgage and protecting the ability to work, the borrower will pay the bills associated with getting back and forth to work to protect the source of their livelihood.

FLI: You mentioned deferred home maintenance. What does that have to do with foreclosure?

Addison: If you walk around your home and inspect for visual eye sores, broken shutters and blinds, damaged gutters, broken windows, rotting wood, a damaged roof, etc; then ask yourself why these items have not been repaired. If the answer is a lack of cash, this is deferred maintenance. When a homeowner cannot afford to properly maintain the home, then they are in serious danger of falling into a track of foreclosure. A new hot water heater or heating and cooling unit could be the domestic overhead expense that puts the home into foreclosure.

FLI: You have been preaching loss mitigation for the past few years. Why do you feel that this is the answer?

Addison: I wrote "How to Save Your Home" for the same reason that I am doing this interview. After counseling 10,000 people and having witnessed tens of thousands of ordinary people stop foreclosure by applying the principles taught in the book, I am absolutely convinced that financial information in this area is vitally important to promote wide spread homeownership for middle class Americans.

Herbert Addison, JD, CHC was interviewed by Michelle Taylor, a free lance writer for the Financial Literacy Institute. You can obtain a copy of "How to Save Your Home" by calling 1-800-413-1579 and it is available wherever books are sold.