October 8, 2007
According to RealtyTrac, an online marketplace for foreclosure properties and the go-to source for foreclosure data, foreclosures in the U.S. were up 56% in the first half of 2007 over the first half of 2006. In Arizona, they were up 128%.
And, according to a recent article in the Economist, “with some 2.5 million adjustable-rate mortgages resetting to higher rates before the end of 2008, everyone knows there is much worse to come.”
Why are foreclosure rates so high now?
The housing boom (especially in states like California, Florida, and Arizona) created a frenzied buyer environment in which many buyers who would not have bought before were able to buy homes with “creative” financing – low teaser interest rates, interest-only loans, and adjustable-rate mortgages that were uncommon before the boom. Even when buyers knew they wouldn’t be able to afford their mortgage when their rate adjusted, they figured that they could just refinance into a better mortgage – and that would be easy since property values were appreciating 50% or more each year.
But then when the market busted, homeowners found that they weren’t able to refinance their mortgages to get a better rate. And when rates adjusted, they found their mortgage payments were 10, 20, even 50% higher than they had been.
The housing frenzy also opened up a huge new market – subprime loans. Sure, there were subprime loans before the recent housing boom, but once housing prices starting skyrocketing, these lenders were coming out of the woodwork to try and get every family and their dog a loan – whether they could afford it or not.
According to a recent article in the online magazine Knowledge@W. P. Carey, “almost 37 percent of seriously delinquent loans (including loans 90 or more days past due and those in foreclosure) in the second quarter of 2007 are subprime adjustable rate mortgages (ARMs) -- even though they make up only 7 percent of all loans.”
What you can do if you’re facing foreclosure
According to the FHA, these are the steps you should take if you can’t afford your mortgage payment:
1. Don't ignore the problem.
2. Contact your lender as soon as you realize that you have a problem.
3. Open and respond to all mail from your lender.
4. Know your mortgage rights.
5. Understand foreclosure prevention options.
6. Contact a non-profit housing counselor.
7. Prioritize your spending.
8. Use your assets.
9. Avoid foreclosure prevention companies.
10. Don't lose your house to foreclosure recovery scams!
If you’re a homeowner facing foreclosure, the absolute best thing you can do – and you should do it right away – is contact your lender. Come clean about your difficulty paying your mortgage. A foreclosure costs the lender a lot of money – tens of thousands of dollars in most cases – and is a long legal process that lenders want to avoid. They’ll help you as much as they can to renegotiate your loan so that you can afford the payments.
One option is a loan modification, where the lender simply modifies your loan terms, such as changing your adjustable-rate mortgage to a fixed rate mortgage. Unfortunately, this option may not be available if your original lender has already sold the loan into an investment bundle called a mortgage-backed security (which many lenders do). Even if that’s the case, though, you still have some other options. For example, President Bush recently created a program, FHASecure, to help nearly a quarter of a million homeowners avoid foreclosure.
If you simply can’t afford your home anymore, talk to your lender about a short sale (where you sell your home and pay off the mortgage, even if you owe more than you sold the home for) or a deed-in-lieu of foreclosure (where you give the house over to the lender).
Stay tuned for more blogs on the foreclosure crisis, including a discussion of what Congress is doing to help homeowners facing foreclosure, and advice for investors on how to take advantage of a unique investment opportunity.
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