Debt Free

Understanding foreclosures is pretty tough when you're the one getting the phone calls. You have that feeling of impending doom and can't really see light at the end of the tunnel. The “recent” foreclosure problem, despite what's been reported in the media, isn't all that new after all. Some areas of the country have been experiencing a steadily rising tide of home foreclosures for over 2 years.

For example Essex, Suffolk, and Norfolk counties in Massachusetts showed an average year over year increase in their foreclosure rates of almost 44% in Q2 of 2005. Consulting firm Global Insight prepared a report in mid 2007 estimating the foreclosure problem, coupled with declining home values, could cost the U.S. as much as 1% of the GDP, due to decreased economic activity.

A group of banking industry regulators and 10 state AGs calling themselves the State Foreclosure Prevention Working Group has been working on the problem for over a year now. The have discovered some interesting aspects to the problem that can go a long way to help understanding foreclosures. It's interesting to note, for example that:

• Payment resets on hybrid ARMS have not been the primary cause of foreclosure problems in many areas. Despite the news coverage that could lead one to believe otherwise, mortgage holders with resetting ARMs was not the cause of many foreclosures. In fact, many (the report didn't mention the exact number, only that it was a significant percentage) sub-prime borrowers were behind on their mortgage payments before their ARMs reset.

  That says to me that many of these mortgage borrowers took on loans which were beyond their abilities. Weather that was due to fraud on the part of the applicant, lenders pushing prospective borrowers toward mortgages that were beyond their capabilities from the outset, or more recent economic factors, such as job loss, is unknown. It could possibly be a combination of those factors and more.

  For all the hand wringing and hollering by the media and consumer groups, it seems as though many homeowners simply wanted a more expensive home than they could really afford, and were willing to bet that continued real estate appreciation would render their decision a good one. For too many that was simply not the case. For these homeowners taking advantage of record low mortgage interest rates and conventional 30 year fixed mortgages, coupled with homes that were more within reach would have been a much better choice. Now the piper has come a calling.

• Refinance options have, as the report so eloquently states, “nearly evaporated”. One thing that the media has gotten right is that refinancing out of a rising house payment is not an option that remains open to very many borrowers. In the past it was a relatively simple matter to grab a lower house payment by refinancing. That's no longer the case.

• 45% of homeowners that have taken the step of contacting their lenders are working toward some type of mortgage modification. That speaks volumes. It isn't in the best interest of the lender to enter into foreclosure. They lose money on every one. As with any business, they're not in business to lose money. Instead of foreclosing on a home, they'd rather get a long term stream of interest income.

  The fact the almost half of all mortgage holders that have spoken to their lender were able to work toward some type of mortgage modification shows why contacting the lender early is so important. Unfortunately some lenders will only agree to such steps once your loan is already in default, but early contact, not avoidance is still the most important step that you can take if you feel foreclosure is imminent.

  There may be some pending legislation that can help with mortgage modification. Currently H.R. 5579, titled the “Emergency Mortgage Loan Modification Act of 2008” is being debated in Congress. It has been placed on the calender, but is still in committee and has yet to be voted on. According to it's description it is “To remove an impediment to troubled debt restructuring on the part of holders of residential mortgage loans, and for other purposes “ what exactly that impediment is, I am unsure.

  It's possibly the treatment of the forgiven portion of debt as income by the IRS. Currently if a portion of your soon to be foreclosed upon home's mortgage is forgiven by the lender the IRS treats that as ordinary, taxable income. It's their equivalent of hitting you when you're down.

  Since the report was released a few months ago, more lenders have taken the step of allowing borrowers to modify their mortgages so the 45% figure is probably higher now. Mortgage modification could be the “new refinancing”.

Nationwide the firm RealtyTrac reports that foreclosures are up 112% year over year for Q1, 2008. The top 5 states in terms of foreclosure filings were:
1 – Nevada
2 – California
3 – Arizona
4 – Florida
5 – Colorado

The bottom 5 were:
46 – Mississippi
47 – South Dakota
48 – West Virginia
49 – North Dakota
50 – Vermont

You'll notice that the top 5 were those states that experienced a rash of investors trying to capitalize on skyrocketing property values, now not so skyrocketing. The bottom 5 on the other hand experienced lower property value gains over the last 5 years. Because they were not as attractive to investors, who ostensibly would be much quicker to become over extended and then jump ship, they have higher foreclosure rates. The other reason is that in certain areas property values went up so fast that the average homeowner had to resort to all manner of unconventional mortgage products to simply buy a home at all. Maybe renting would have been a better idea, but hind sight is 20/20. Hopefully this will provide a bit more information to help in understanding foreclosures. For more help, see my previous post on how to avoid foreclosures.