how come so many homes are going into foreclosure lately?

Question

i don't quite understand when i read the news articles, although i know it's probably complicated. does it have to do (basicly) with the types of loans that were offered? or with the prices of homes?

Answer 1

There is something called "sub-prime" lending that allows people to get around making down payment when they buy a home. (Conventional financing, you have to put about 10-15% down) You get a second mortgage for that part, too, so the entire price of the home is mortgaged. So, if housing market drops, now you owe more on the home than it's worth. Many housing markets were overpriced lately, and now it is catching up. Add to that, some of the sub-prime mortgages were variable rate for 3, 5, or 7 years and the refinancing date is coming due...interest rates are higher than they were when the original loan was made and people can't afford the new house payment.

Bottom line, people were buying houses they either could just barely afford, or were beyond their means. Creative financing was allowing them to do that, but it has caught up with them. They can't even sell the homes and come out ok because prices have dipped and more homes are on the market, so it snowballs and you get more foreclosures.

The other thing I don't think many first time homwowners realize is all the other "upkeep" costs associated with home ownership that you don't have when renting an apartment. Things like utilities, property taxes, insurance, homeowner's association or subdivision maintenance fees, home repair, landscaping and lawn care, etc. etc. can really add up---you can't just look at what you are paying for rent and estimate that you could afford the same amount house payment; it doesn't work like that!

Answer 2

For several years, the rates were very low, many time below 5%. Historically, rates will not stay that low for long. 10 years ago 8% or 9% was a nice rate, 20 years ago those were still good rates. In the early 1980s, the rates were 18% and up! It was like buying a house with a credit card. But because the rates were so low for so long, people got a false sense of security. In the industry, we didn't expect the rates to stay low for this long. Even now, they're really quite low.

In the meantime, there was a "bubble" (sorry for using that cliche) that had home prices/values increase dramatically. Houses that were $11,000 new in 1960 were selling for $450,000. People bought those houses on ARMs, opting for a low payment for 3 or 5 or 7 years, then the rate started adjusting. Most arms have an annual cap -- 2 - 3%, and a lifetime cap -- 5 - 6%. Some adjust annually, but some every 6 months. People bought houses at high prices with temporarily low rates. Now those ARM are coming up for adjustment, and people are finding that the house is no longer valued as high as it was 3 years ago, and they can't afford the new payment. And the bubble has burst!

There are also 80/20 loans. You get one mtg for 80% and another for 20%...the second is referred to as purchase money second to differentiate it from a home equity or other second mortgage. At the end of the fixed term, the rate increased by 2% to 3%, and they cst finds they can't refinance because they don't have 90 or 95% equity in the house...not only is the value frequently lower today than 3 years ago, but they have an uninformed idea of how much of their payments actually go to principal.

Subprime lending allowed people with poor credit to buy homes. On one hand, more people were able to reach their American Dream, but on the other, they'd already shown they couldn't handle money so why did we give them more? (Actually, my company only deals in so-called A Paper, so we declined their loans.) These people got adjustable rates so their debt-to-income ratios would qualify and now they can't afford the increases, and can't refinance because they still owe more than 90% or 95% (generally you can't refinance 100% of the value of the property) and the house isn't valued as high as when they bought it.

Then there were interest only loans. These are great for a very small segment of the population, but not for the average Joe. But people saw the lower payments (NOT lower rates) and figured they could buy a lot more house for a lot less money. What they didn't seem to grasp was that at the end of the interest only period, the payment would drastically increase, AND they still owed the full amount they borrowed. I tried very hard to talk people out of this loan, but if they qualified for it, we had to give to them. This loan is for someone who will either sell the house anyway in a couple years, like the corporate employww who is transferred frequently, or someone whose income will increase dramatically within the next 5 or so years, like an new doctor or lawyer or other professional who is still in the "intern" phase of his career.

The behavior of both lenders and borrowers is responsible for this situation. Lenders offered products that could be used wrong, and many encouraged anything to get the loan through, AND borrowers saw a chance for a loan, without worrying about how they'd pay it back.

Answer 3

Basically the problem has been variable rate loans, sold to people in difficult financial situations. For example a 4% fixed 30 year loan means the loan will be 4% for the entire 30 years - your payment will be exactly the same the whole time.

The variable rate is based on the rates the feds set. So it was low a few years ago so people were getting 2% variable rates, then their rate would jump to say 6%, causing their payment to go from $1200 a month to $1900, making it impossible for them to pay. The falling price of houses means many may actually owe more than their equity - thus many will just allow the foreclosure to occur because it will cost them less (though will show up as bad credit).

The larger problem is mortgages were sold to people who couldn't afford them or who didn't have good credit. This is most likely caused by a rush to grab as many mortgages as possible - most likely by 'front loaded comissions' - basically the salesperson gets a huge comission for selling the mortgage - and does not suffer any losses later if the person forecloses. Very poor management.

Answer 4

Both actually. Many people got adjustable rate mortgages (ARM). They qualified for the load with the low "teaser" rate, but they they don't have enough income when the payments went up. It was bad business practice on the part of the lending companies.

Also, historically home prices go up and down. At the same time that many people were getting the ARMs the prices were very high. Now prices have gone down somewhat and they are unable to sell the house for enough money to cover the loan. With that avenue of escape cut off they are unable to make the payments and the lenders foreclose.

Foreclosed houses sell for less money because the lenders just want to unload the property to recover what they can. This lowers prices further.

Answer 5

Homes are going into foreclosure due to the interest re-set on sub prime mortgages.

Let say you bought a home for $200,000 with a teaser rate of 3%

The 3 % interest is locked in for 2 years.

After your teaser rate is up, your interest goes to the market rate 6%

What once was affordable now becomes too much of a payment to handle.

So, no big deal, I will just refinance right?

Wrong!

Your home is worth LESS than what you paid for it and the lenders are no longer doing 100% financing.

Now you have 2 choices.

1. Pay the payment that has just doubled on you.
2. Walk away from the home.

Most people are choosing option #2.

Hope this helps.

Terry S.

http://www.Welcome2Arizona.com

Answer 6

Because too many people bought with the never-ending thought that the market would never turn against them! Meaning, they had or have very little equity in their homes and ADJUSTABLE MORTGAGE RATES! They were sold these things thinking that rates could never move up, so the bought more house than they could really afford, leveraged it to the hilt and now when rates jumped, they can no longer afford the payments! Simple, you see, they should have tried a smaller mortgage!

Answer 7

Because so many people were convinced that the adjustable rate mortgages they were signing were a good idea. If you had a five year ARM at a low rate that would adjust to a rate pegged to something like the treasury index or prime + 2%, your monthley payment will increase several hundred dollars at the end of that five year period. Many people seemed to not quite know what they were getting into. I spent a lot of time talking my clients out of using programs like this because I could see years ago that they were being misinformed.

Answer 8

I think it has to do with people buying more house than they can afford and that some got a variable rate loan that increases the payment when the prime lending rate increases. People should make sure that they get a fixed rate loan and make sure they don't over extend there finances.

Answer 9

it does mostly have to do with the loans given and who they were given to. many people who could barely afford it got an ajustable rate mortgage and as interest rates have risen their monthly house payments have risen and they are now unable to afford the $300,000 house that they bought.

it is a lot of people's fault including the mortgage companies for giving the loans in the first place and the people for buying what they can't afford. but so many people have no notion of looking ahead to the future.

Answer 10

basically mtg companies offered programs (no doc, Stated, no money down) that allowed people to own homes who generally cant afford these homes in turn with the market slowing and banks cutting programs these people werent able to refinance out of their loans into new loans and cant sell them either due to the declining market this all adds up to bad loans and foreclosure