The Foreclosure Problem - Has It Gone Too Far?

The more informed buyers have known for a while, yet lots have been hesitant to read what it says. Many residents of the United States are finding themselves getting deeper into debt. Part of this problem likely comes from the cost of owning a home. For a larger segment of homeowners, housing debt is forcing a tough situation into a dangerous one; creating a "foreclosure crisis" that will likely last quite some time.

Earlier this year, current data released by the Department of Housing and Urban Development are showing an alarming upswing in the rate of foreclosures. In some areas, of all home owners who were extended sub-prime loans, the rate of default is as high as 14-20% when 4-6% is considered "healthy".

This data has been all over the news — the stock market has been in upheaval. Sub-prime lenders traditionally specialize in extending financing to borrowers with credit issues, unable to verify income, employment or other factors that make them a poor fit for traditional financing. In the last year, many major players in the sub-prime market have sold off operations or in some cases simply closed their doors and gone out of business. Just as their borrowers were unable to afford the escalating home ownership costs, many sub-prime lenders found it impossible to absorb the foreclosure rate we are now seeing.

The major issue doesn’t stop with the sub-prime market. Even traditional banks are increasing requirements and placing more scrutiny on the loan approval process. This makes us wonder: how did this mess ever begin in the first place?

A good portion of the resons can be laid at the feet of the borrowers themselves. In this age of "big is best" many Americans see a big home as an indicator of success. This pushes many buyers into trying to purchase a larger, more expensive home without enough thought to the affordability of one. Often buyers push how much they can afford and end up in a "house-poor" situation or worse.

Blame can also be laid at the feet of some financial professionals. Who is better informed as to how much home a borrower can afford? The current debt-to-income ratios are either being ignored, or the types of loans that lenders are providing are not good choices. Loans like 28/2 and 27/3 loans with fixed teaser rates that adjust after 2 or 3 years with a balloon or margin are just a few of the loans that have created difficulties for home owners.

Of course the ultimate result will be better qualified and better educated borrowers but did things really have to go so far? We've seen foreclosre problems hit most of the large regions we work including Aurora real estate, Batavia real estate, Plano real estate and Yorkville real estate. Frankly, I sometimes think they did. Lately it seems like it takes a good deal of shock to get some things back on track. In the mean time, if you are thinking of purchasing real estate in the next few years, it’s important that you start talking with your local REALTOR or loan officer and make sure your finances and credit scores are in order before you go forward with applying for a loan.