Lots of homes are being foreclosed on. Is this because people over bought, or because people are losing jobs?

Question

Most of the homes that are being foreclosed on, is it because when people bought the house originally, they were already stretching their existing budgets to try to get into a higher end house, and as a result of ARMs or other creative financing, they could no longer handle it....or.... does the high rate of foreclosures represent people who can no longer afford homes because of downsizing, layoffs etc. Between the 2, which is the more likely answer...something the homeowners could have controlled ( buying a home more than they could reasonably afford) or something they could not control( downsizing etc).

Answer 1

The mortgage industry is estimating that 19% of all subprime loans written since 2005 will go into default in the next year or two. 1 in 5. Wow.

HSBC, a huge international bank with a large subprime mortgage division, just announced that they are taking something like a $10 billion accounting charge to offset bad debts. Much of it tied to their subprime mortgages.

2-3 years ago, it wasn't uncommon for someone with a 560 credit score to be able to buy a home, 100% financing, with an interest-only ARM to qualify. And they're qualifying off 50% of their gross income. And that qualifying excludes many important things we have to pay for: car insurance, medical insurance (& prescriptions), so in effect, they had little to no extra money at the end of the month after paying their mortgage, taxes, etc...

When the interest-only period ends, so did the low teaser rate on their ARM. A $1200 payment can turn into $2000 overnight. Literally. If you're scraping to pay the $1200, you're screwed at $2000.

But it's not all the banks' fault, nor is it the new homebuyer's fault entirely either.

Corporate profits have been at record levels in the past 2 years. At the same time, wages have remained flat. Corporations are paying their stockholders (the already rich) instead of increasing wages, which more people could use and spread around the economy, instead of just reinvesting for more profits. Most people are paying so much more for their medical needs, their incomes are actually going in reverse.

All of the heat in the housing market disappeared overnight too. It was easy to justify buying at 100% with a risky loan, under the assumption that the house would gain 10% in value each year, so after the 2 years and your ARM is going to adjust, you should have 20% equity in your home. Sounds great. Didn't happen. In many areas, values stayed flat. In some areas, values even dropped. So, your payment doubles, you go to refinance, and find out you owe $20,000 more than you paid for the home 2 years ago. You can't make the payments, and you can't refinance because you have no equity. What do you do? Get foreclosed on. Not much in the way of other options.

No one is completely blameless here, but in my humble opinion, it's not just buyers being stupid. I put more blame on the banks than the buyers, actually. And employers have also helped by caring for their shareholders at the expense of their own employees.

Answer 2

I think it just boils down to people stretching their budgets too far. And not being prepared for the unexpected costs. Whether it be medical expenses, losing a job, or major home reparis. Sure, most people can afford there monthly payments up front. But if they have little room to spare they could be trouble if problems come up.

You need to examine all of these things and have back up plans. Young couples who are going into buying an expensive home better make sure they have something, or in more cases SOMEONE to turn to if they need some help through rough times.

For the guy who said the economy is not healthy, actually it is very healthy right now. And economis will tell you that, but typically that can lead to more foreclosures because it leads people to beleive they are richer then they really may be.

Answer 3

I agree with the first answer from Casey_. ARM has a lot to do with foreclosures. Working for a Realtor I see people going with these types of loans and it's great at first when rates are down, but when they go up, like they inevitably will, it's hard to make the higher monthly payments.
Plus, when buying a home, people are given an amount that they can afford to buy up to. Many people buy right up to that amount, not taking into consideration that finances change, things come up, objects break ..better to leave some space in your finances for emergencies.

Answer 4

The chief suspect in this instance are the adjustable rate mortgages that you mentioned. People bought their houses with an ARM because it sounded like a good idea. In fact, it is a great idea when interest rates are very low. But most people didn't expect interest rates to jump as high as they did. Now, some people with monthly mortgages of $750 began having to pay $1250, for example, once the interest rates rose. For many, this wasn't affordable since they were living basically paycheck to paycheck.

Also, the economy itself hasn't been doing that well. The value of the dollar has fallen compared to other currency, namely the Euro. Due to a slugglish economy, people have lost jobs and gained more debt resulting in foreclosure.

You are right on the money.

Answer 5

My experience is that many people have bigger eyes than they have wallets.

You can get into a place, then not be able to take care of it. Also, taxes and insurance rises over time, or they get laid off and find themselves in a pickle.

My opinion, some people just shouldn't own a home. I've seen people try to rehab a place, without the foggiest idea what it costs, then just walk away when they couldn't afford it.

Answer 6

Over priced their budget, and then Taxes raised, Last year Indiana had 4 pages in the paper of foreclosures. These pages were 5 columns across on each page. Now that a lot of homes lost.

Answer 7

Most often buying something they couldn't afford. Many times people don't understand what they are buying, i.e. what the expenses are, taxes, mortgage, utitilities, maintenance, etc. Sellers often prey on the ignorant and pass along liens or faulty structures and buyers not familiar with real estate don't get proper title searches or inspections. Recently banks have been too lenient in providing financing, now they are feeling the after effects.

Answer 8

True that many bit off more than they could chew and also true that ARMs and other deceptive practices are responsible for many foreclosures.

But the main reason is - China. The U.S. trade imbalance with china is responsible for millions of job losses. Our factories continue to leave for foreign countries taking the American Dream with them. American workers are being replaced with low-paid, Chinese workers who are being exploited by disloyal U.S. companies whose only concern is their profit margin.

American workers will continue to lose homes until such time that we are able to enter a Wal Mart (or other American? discount store), and see that the majority of the goods for sale there are - MADE IN AMERICA.

First, our homes. Then, our cars. Then, our nation. What's happening is apparent................................

Answer 9

Over bought