Why so many foreclosures?

 Why are we seeing so many foreclosures lately?  Is it the economy? The jobless rate? Or, maybe just tough times?  Not really, although these things do come into play.  A lot of it stems back to some creative loan practices from the past few years. 

Here’s what was happening.  First loan guidelines were very relaxed so that almost anyone who wanted a loan could get one, but at what cost?  Well, first there are the adjustable rate mortgages (ARM’s) that started at a lower rate the buyer could afford in order to get the buyer into the house.  Many of these buyers had less than desirable credit and were told to keep their credit clean for a couple of years and then, before the rate went up, re-finance to a better fixed rate that  they could afford.  Unfortunately, many of these buyers were not able to re-finance and were stuck in the ARM with escalating rates that they were now not able to afford any longer.  Oh, and by the way, did we mention that many of these loans were 100% and had all or most of the closing costs rolled in?  Since there was no down payment involved and the home has not had time to accrue that much equity, they are now upside down in the home not being able to sell it for enough to cover the amount owed.  Not being able to afford the new higher payment coupled with not enough equity left many with the only choice they knew to make and walk away losing their home to foreclosure.  This alone is not the only culprit, but the primary one in my opinion.

Briefly, here are a couple of other things that have come into question recently.  One, is the “Stated income stated asset” loans.  These were granted to people who were non W-2 earners who had good credit.  The problem is, that these people were not able to prove their income or assets and an amount was given that would qualify them for the loan some of these amounts were falsified and the buyer could not really afford the payments, many of these were also 100% as well.  As a side note, there are some lenders being charged with fraud because of this.  The other loan that has caused some issue is the “Interest only” loan.  This loan is good for investment properties where the  borrower has no intention of keeping the house for a long period of time and will be turning a profit on it.  Unfortunately, some people bought homes not intending to sell quickly and were making interest only payments.  The downside to this is that many of these are negative amortization loans and the principal balance instead of going down was actually going up.  Again putting the seller in an upside down situation.

Hopefully the next time someone asks “why are there so many foreclosures lately?” you will now have a good answer.