The Reality of Foreclosure

May 1, 2009 · Posted in Financial Assistance 

Like so many Americans, do you ask yourself these questions:

Why does the foreclosure problem exist?
Why are banks taking over homes?
Why are people unable to afford mortgage payments now?

The issue stems from a couple years back when banks had a surplus of money to lend and they decided to offer low teaser rates to people of dubious financial standing. Today, we know those teaser rates to be the infamous ARMs, or Adjustable Rate Mortgages. ARMs operated to allow a low initial rate followed by an increased rate which was usually higher than the national standard.

Many homeowners took the bait due to the housing boom which they were eager to get their foot in the front door-so to speak. These homeowners fell into one of two categories. The first group hoped to ride the wave of the teaser rate through its expiration. Then they would refinance their loan which would shield them from the rate increase and put money in their hands from the equity in the house. Many of these refinancers were able to clear $25,000 to $100,000.

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The second group planned to buy a home at an interest rate and with the option of flipping it, resell it for a profit. At one point, a buyer could purchase and resell immediately, clearing $60,000 without any fix-up cost. With both of these groups, ARMs were of little consequence.

But consider this story about an Orange County man who refinanced his home three times in one year and collected a good amount of cash each time. The bottom finally dropped out when the housing market fell and his teaser interest rate expired. Payments on his house increased from $3500 a month to $6000 a month. He lost his house.

Which state has the highest foreclosure filing totals?

For its population, Nevada has the highest number of foreclosure filings. The state has one foreclosure for every 75 households, which is 3.5 times the national average.

California has the highest number of total filings. To put it into context, while California has 10 percent of the nation’s population, it only has 18 percent of the country’s foreclosures.

Nevada, California, Florida, Texas, Colorado, Georgia, Michigan, Arizona, Ohio and New Jersey are the country’s Top Ten foreclosure states boasting the highest numbers in the nation.

Out of the 100 largest metropolitan areas in the United States, the city of Detroit has the worst foreclosure rate with one foreclosure for every 51 households. Such a statistic places Detroit at over five times the national average.

After a foreclosure, what happens to the home?

When a home is in foreclosure, it is typically sold at auction. In the markets hit the hardest by the housing slump, as few as 1 in 100 homes are sold at auction. The other 99 never receive a bid equal to the lender’s starting bid. While it may be nice to believe, you can’t purchase a $300,000 house for $100 at auction. Lenders have the right to bid and if no one else places an opening bid, they will.

In these markets, lenders are not offering mind-blowing deals to sell houses in foreclosure. In such areas, it’s typical to see a couple foreclosed houses in one neighborhood that will remain on the market for a few years. The idea is that the lenders are waiting for the housing market to kick back into gear.

Granted some lenders seek to sell houses quickly at reduced prices, but these are few and far between. Another major reason that many houses are placed on the auction block with only a few bites is that before a buyer is allowed to make an offer, they must present a cashier’s check with the full amount they intend to bid. Outside of investors, few people have the money on hand to buy a home for the full purchase price. But in case you do have a couple hundred thousand dollars lying around, go bid on a house. Odds are you’ll get it.

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