Home Loans – Can They Directly Affect A Foreclosure?
Less than 25 percent of mortgage defaults during the rise in foreclosures are being blamed on a loss of jobs and other factors traditionally related to economic recession. Instead, most foreclosures are the direct result of exotic, high-risk loans, home-owner equity withdrawals, and adjustable rate mortgages that have seen rapid interest rate increases.
According to Business 2.0 Magazine, the month of September saw more than 112,000 homes in the U.S. fell into foreclosure, a rise of 63 percent over a year ago. In order to help curb the rate of mortgage loan default, the government is scrutinizing the guidelines for underwriting standards applied to consumer loans. Of particular concern are interest-only and payment-option loans that allow the borrower to pay little or no principal, and in some cases less than the full amount of owed interest, each month.
The Federal Reserve defines interest-only mortgage loans as those in which a borrower pays no principal for the first few years of the loan
Payment option mortgages provide a borrower with flexible payment options, including plans where the monthly payment is insufficient to cover the interest due and the balance owed keeps increasing
Interest only loan rates can be fixed or adjustable. So called payment options are adjustable and tied to interest rates that have risen more than 17 times within the past two years
These loans were especially popular during the recent housing boom, because real estate prices skyrocketed, making it difficult for many buyers to finance a home. As a result lenders relaxed the rules, and buyers piled on debt that allowed them to live beyond their means. Many consumers planned to buy into a hot market, sell after a few years, and pocket big profits. Others hoped to keep their homes, but borrow more each year in the form of home equity loans, as the value of their property continued to rise.
Both strategies are successful if, and only if, the market continues to climb while interest rates on adjustable mortgages remain low. Those who bet on this high-risk strategy were wrong. The real estate market is no longer a sellers market it is a buyers market and real estate bargains can easily be found.
Often with these types of exotic loans monthly payments do not contribute to paying off the principal. It is possible to pay on them for years and still owe more than the amount of the original loan. And home owners have also withdrawn unprecedented amounts of home equity, by borrowing against the market value of their homes. When real estate values collapse, those with large mortgages and excessive equity loan balances find that they owe more than their collateral is worth. Even if they sell their home they will not be able to repay their loan obligations, and foreclosure becomes inevitable.
Property owners in the pre-foreclosure phase of foreclosure are highly motivated sellers. To avoid the prospect of foreclosure – which often leads to bankruptcy – they will often give buyers huge concessions in order to sell their property in a competitive buyer’s market. A great way to find pre-foreclosures is to go to ForeclosedHomes.com.
The number of past-due mortgages has risen steadily over the last few months, and appears to be due to looser lending standards and slowing home-price growth. In other words, the current rate of foreclosures is not related to the job market or overall economy, a situation that veteran economists call highly unusual. What that means for foreclosure investors is that any negative news on the economy – such as a spike in energy costs, drop in the stock market, or announcements of corporate layoffs – could precipitate even more foreclosures – and that could potentially usher in the hottest foreclosure market in history.
Meanwhile, lenders are feeling the pinch as their business slows. To generate more loans, they are apparently continuing to relax their underwriting standards – perhaps taking advantage of the last chance to do so before the government steps in to curtail their practices. And the rate of foreclosures – directly tied to “exotic” loans and the rising cost of popular adjustable rate mortgages – continues to climb and offer buyers valuable property at attractive discounts.