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What Do New Foreclosure Numbers Really Tell us?

In May, 2010, a record number of 94,000 foreclosures occurred through

out the country.  The initial wave of foreclosures that began in 2008 were due to lenders making high risk loans and consumers buying homes they couldn't afford over the long term.

Today, foreclosures are due to job loss, underemployment and other problems that are a directed result of a failing economy.  These are not high interest or risky loans but homes of people who have spent years making their mortgage payments faithfully only to find themselves unable to pay when their income was lost.

The truth about the housing crisis is partially hidden by the continually optimistic reports of realty groups.  After all, you can't sell houses when people think no one is buying.  It makes to say things are improving and to try to spin the downfall of the housing market as an opportunity for investmentj.

Perhaps no business has lost as many workers as real estate when looking at percentages of unemployment.  Realtors are paid on commission and have costs of advertising and other promoting, fuel and auto repair and the costs are paid whether commission are earned or not.  At the end of March, more than 10% of those owning a home had missed one or more mortgage payments.  This is a record high and although those properties are not in foreclosure, they are definitely at risk of foreclosure in the coming months.

A slight decline in foreclosure rates in May was grasped as a sign of a housing recovery in the future.  In truth, it may only indicate the unprecedented inventory of vacant foreclosed homes is becoming a burden to lenders who are now slower to take over properties.  The thinking is sound.   A homeowner who has missed 2-3 payments yet is able to pay his mortgage most months is occupying the property and maintaining the condition of the property.  For a lender, this may be preferable to adding another vacant, deteriorating home to their huge inventory of foreclosed properties.  If the housing market begins to impove, the lender can foreclose quickly and take over that home.

The federal government plan to bail out homeowners was doomed to failure form the beginning.   The plan relied on voluntary participation from lenders and for many homeowners, that participation did not happen.  The program required massive amounts of paperwork, was slow processing requests and the definition of which homeowners could qualify for the plan was skewed from the beginning.   Homeowner who had knowingly taken risky loans with payments they knew were not affordable or who borrowed 100% of the purchase price of their home were considered to be "under water".  The plan was designed to help those in that condition but ignored the needs of homeowners with good credit and significant equirty in their property.   When those responsible homeowners faced foreclosure due to job loss, they learned the program did nothing to help them renegotiate their mortgage.

In the end, the program that was launched with the prediction it would save the homes of 8-9 million Americans was responsible for saving only about 100,000 homes. The lack of success has been downplayed but is clearly seen in the numbers released.  If the cost of the housing/mortgage bailout plan reached the estimate of $275 billion announced when it was launched, taxpayers should rightfully be outraged.

The soaring real estate prices in areas such as California and the Northeastern states that took place in the years leading up to the economic meltdown in the US have led foreclosed homes in those areas to have a devastating effect on home prices.  California leads the country in homeowners who are deciding to walk away from their homes and mortgages even though they are current on their payments.  For a homeowner who paid $500,000 for his home in 2000 to realize that similar home on his street are now for sale for $250,000 as foreclosures is a big financial hit.  Not only has he lost any equity in the home but that owner may have a mortgage that is far more than current appraisals can support.

For those with sufficient funds to purchase another home or able to rent  a home similar to their own, walking away from a big mortgage is a personal financial decision.  Some will buy the house down the street and negogiate with the foreclosing bank for a great deal.  These people often end up in homes superior to the one they previously owned with a much smaller mortgage to be paid.  This method of downsizing a mortgage while upgrading your home has become so popular there are agents who now help homeowners navigate the process.