Why are there so many Foreclosures across the United States?

Question

I always hear on the news and the internet that many homes are being Repo or forclosed? What's wrong with homeowners these days?

Answer 1

It's because people were being offered and accepting loans that were larger than they could actually afford. For example, when my husband and I applied for a loan, we were approved for $500,000. This is a lot more than we could actually afford the payments for! We went with a house that was $200,000, which made for monthly payments of $1100. If we had done, say, $400,000, the monthly payments would have been $2200. If one of us lost our job, it would be really hard to keep making that payment!

The other part is that when interest rates were low, people were getting "interest only" loans. So they were getting $400,000 loans at low rates and only paying the interest (say, $1000/ month). They weren't paying down the mortgage or building up any equity in their homes. But the idea was that they would buy a $400,000 house, pay the interest only for awhile, and sell it for $500,000.

However, then the market started getting glutted- that is, filled with a bunch of homes. More homes were for sale or being built than there were people looking to buy them. Home prices started going down, interest rates starting going up. When those people with interest only loans (who could afford $400K homes at $1k/ month payments) suddenly found their payments jumping. So they really couldn't afford that house anymore (especially considering some of these people were investors who own a lot of houses). They fell behind on their payments. If you fall behind long enough, the bank will foreclose.

It's more complicated than that, but there's a good overview for you. You'll be seeing a lot more of this in the future, by the way. It's probably going to get pretty bad.

Answer 2

People financed using $0 down, interest-only loans; or they used ARM (Adjustable Rate Mortgages); or they just went wild using credit cards etc. after they bought a house that maxed out their credit.

With the interest-only loans, the principal gets added to the end of the loan meaning that as time goes on, the loan becomes more than the original loan and the house is not sufficient to support the loan-to-value ratio that the loans require or that the banks require. They are stuck with a house that can't sell for enough to pay off the loan.

With the ARM, the mortgage was placed assuming that the income would exceed any rate adjustment so that the buyer would always be able to pay the loan. However, rates went up quickly and people found that they couldn't afford the mortgage payment.

In other cases, they were at the max on credit cards (in addition to the new loans) and did not realize that the credit card companies will bump their interest rate to the maximum permitted if ANY of the credit cards are late being paid -- even if the credit card was issued by some other company. As a result, people are paying the most they can on mortgage and then finding their maxed out credit cards just went from 9% to 29%. Now they can't afford everything so they have to let go the house.

As one of the earlier answers said: Wants versus needs and not knowing the difference.

Instant gratification = the perceived American way.

Answer 3

What has happened to the mortgage industry in the last 5 yrs is that they lowered the standards to be eligible for a mortgage. You didnt need to show a paycheck, no employment verifications and people were saying they make 100,000 a yr when they made 50,000. Then they purchase a home for 400,000 and guess what? They can't make the payments. Or payments originally were so cheap due the adjustable interest rate they started out with. Maybe a 600.00 a month mortgage which now is 1200.00 or worse. It comes from pretending you are something you'r e not and the mortgage companies who allowed you to pretend....Now they are pretending they have a home when all it is , is a cardboard box on the street corner. The mortgage co are pretending they still have money coming in when they dont. Lots of trashed homes but no money. Very sad situation.
Sorry for being long winded here. I worked in mortgages for 5 yrs and saw this coming a long time ago.

Answer 4

There are two types of homeowners...the investor and the resident. The resident pays their mortgages. The investor looks for a quick flip, when he is unable to sell his house, he forecloses on it.

The homes being repo'd or foreclosed are mainly investors. There are some that have been shocked by the interest rate change on their mortgage. But the majority of the issue has been an oversupply of houses due to not enough demand.

This is a great time for buyers and those wanting to have a good deal. But before you invest in foreclosures, I suggest you read some books on it. My favorite book is Complete Guide to Real Estate Tax Liens and Foreclosure Deeds: Learn in 7 Days [ISBN 0978834682] by Don Sausa.

Answer 5

Because people overextended. When we hit a major housing market...like we did in recent years....where house prices go through the roof, everyone thinks that they will only continue to go up. They will buy at ridiculous prices for ridiculous terms. The whole "McMansion" thing didn't help. People bought houses way out of their price range using creative financing, such as ARMs and interest only loans. They just assumed prices would keep going up and they could get home equity loans for the equity OR turn them around in 2-5 years and make a huge profit.

This didn't happen. The housing market has corrected itself and everyone who bought on the high, inflated end with financing that was "shaky" is in trouble. Some are finding it cheaper to let the house go into bankruptcy rather than to continue making inflated mortgages payments, as they can't sell and break even on the deal.

They gambled and lost.

Answer 6

I could get into all the sub prime bs but who cares about the little details.

do you remember a few years ago when Bush pushed a bankruptcy reform law. ie (to make it harder to file for it?)

Well bankruptcies kept people in the game they could get rid of all the credit cards and in most cases keep there houses
I don't think that's the case anymore.

So people got in over heads and in the past had a way out Bush and the Republicans took that away.
So now we are seeing a lot more foreclosures.

Hey Bill Clinton had the stock market bubble that went pop
G W Bush is going to have the housing market go pop
and the stock market. good grief

Answer 7

The problem is that so many lenders did so much creative financing for people who couldnt really afford the homes they were buying --- People were doing adjustable arms, balloons, 100% financing, 100% interest... Now the interest rates are increasing and those payments are increasing so the people can n o longer afford their payments --- Then to make matters worse they try to sell their homes but they dont have any equity... A lot of people are desperate to sell their houses in an effort to avoid forclosure since they cant afford the payments anymore but then to make matters worse the market is saturated which drives prices even lower....Some people really are screwed right now and have now choice but to foreclose....

If youre in the market to buy now is a good time unless you have questionable credit -- mortgage companies took a lot of risks in the past but they cant afford it anymore....

Im one of the lucky people who have a ton of equity in my house and I'm actually in a fairly limited market so Im trying to sell my house at a slightly less then market value price because I cant beleive some of the deals on the market right now....

Answer 8

What is wrong is that many people bought houses with interest rates that tend to get higher as the sales of houses decrease or have been buying houses way out of their price range and mistakenly think that their income will rise to cover it ( And it doesn't) and they had been only covering the interest in their payment.. Problem is they didn't take in consideration that property taxes are rising in leaps and bounds and the price of fuel, gas and lights keep rising also. Not to mention a lot of businesses are moving across the ocean for cheaper labor. Leaving many once high paid people with out a job.

Answer 9

People purchased homes they could not afford with loan products they should have never even been offered. There is blame on both sides. There were no victims here. If someone needs to be told they cannot afford a $1500/month mortgage on a $2000/month salary, that person should not be allowed to walk unescorted on the sidewalk. That person is too stupid for anything but to sit in a locked padded room day after day.

Answer 10

Last year, there was a rash of $0 down, subprime mortgages. This year, these idiots are having problems paying them back. Banks are going under, and those who don't are tightening up their employment verification and closing their doors in the faces of loans that seem shady or if the people seem like they are buying their house using their champagne tastes on a beer wallet budget.

You will continue to see $2mil-$3mil houses popping up on the market until all of the dreamers are weeded out of the system. Hang tight...rates will drop like flies and banks will start opening up again. In the meantime, sit back, and watch the dust rise from the fallen banks.