Foreclosures May Not Be What They Seem To

We are hearing  a lot o inflammatory press about the foreclosure market. It subsides, and then rears its head once more on slow news days.

From all of the foreclosure talk, a more careful examination of the numbers says that nationwide, more than 96% of al mortgages are being paid on time. Of those that have problems, around .4-.6 percent of the total market is actually in foreclosure.

Nearly all of these were very high risk subprime and what are called Alt-A programs, such as sated income loans. Not all of those were owner occupied homes loans either.

So, a mortgage broker made loans to people, without income verification, or asset verification, took the borrower's word, that as a carpenter or bricklayer, it was possible to earn $16,000 a month income, and that the borrower was not required to pay tax on that amount of income. Further, since the borrower had no bank account, it is assumed that the borrower simply buried these funds in a coffee can in the back yard.

If this scenario sounds a little odd, it shouldn't. These types of loans are a part of the foreclosure problem. I have seen them in the field, so it is first hand observation. Mortgage brokers, trying to get a loan to acceptable ratios provided "guidance" to borrowers to get them these loans, some with adjustable rates, in order to get them qualified for their mortgagees. The most common comment I have heard from borrowers is that the broker asked them if they wanted the loan at this payment or not? Many were also told that they could refinance their loans at a lower fixed rate, in a year or two (the prepayment penalty time). In the meantime, property values declined as neighborhoods felt the foreclosure pinch, and the buyer lost a job, or spouse's income that was relied upon for the payments. Worse yet, a spouse died, or a single parent lost  a child, and missed payments during a period of illness or grieving. These are all real scenarios I have experienced, and verified in my daily work.

What does all of this mean? The news isn't as bad as portrayed, but is not good news, either. There are some neighborhoods more affected by this than others. What I am seeing are that first time buyers, older homeowners, and first time investors were the people who were hooked into these programs more often than not. There were a lot of higher than normal fees, and other loan costs in some instances, and many other shenanigans going on.

Atop all of this, were highly leveraged real estate cartel scams, which involved using a person's credit to purchase property, promising to deliver a portion of the profits to the borrower, whose credit was used. Unfortunately, many of these people were bilked of everything, and face foreclosures on more than one high end property.

The housing market will return to a normal level, and home equities will appreciate. On thing that is certain is that there is a limited amount of land on the planet. Of that land, only so much of it can be developed. With this scarcity come organic appreciation. Also, people still have babies, which become tenants or homebuyers.

The best advice I can offer is to throw out the newspaper accounts, and don't even read them. Do the same with the TV news. After all, the media outlets only make money off selling bad news anyway. They haven't figured out a model to make money on good news.

I would love to hear your thought on this. Drop me a line.