Why the huge increase in Foreclosure Rates?
Foreclosure Rates were through
the roof in 2007.
According to Realtytrac.com foreclosure filings increased 75% from 2006 to 2007.
How did this happen?
Frankly speaking, its part of the cycle. Housing prices and development can't keep growing forever.
2000 - 2005 were booming years for the housing market and the mortgage industry. Residential subdivisions were growing like sea-monkeys all over America.
100% financing with so-so credit was very common. "Adjustable rate - whats that? Who cares, where do I sign!"
Some will say that there are a couple of fundamental factors that led us to this extreme of a situation - namely lack of consumer financial education and predatory mortgage lending.
Another way of putting that is: Some lenders were taking advantage of financially unqualified individuals buying homes they cannot afford. Lenders have certain guidelines they follow to determine if someone can afford a loan. That filter the borrower goes through when an underwriter analyzes the deal, is those very guidelines being checked(and ignored in some cases).
Many borrowers don't take into consideration - and are not properly advised about the monthly note that comes with property taxes, association dues, insurance, PMI, and adustable rates in many cases.
What you end up with is a household spread very thin and the slightest financial turbulence leaves a deficit in the household's budget every month.
The snow-ball effect
Illinois foreclosures and foreclosures all over the US in general have risen greatly and most likely will keep rising, due to a snow-ball effect.
See if this scenario looks familar:
John and Jane Homebuyer get their house in 2000. They 100% finance the house and move in with no money down. Life is great for a few years until they realize that they have so much credit card debt from filling the house with furniture and plasma screens and hardwood floors.
They finally take notice of the dozens of mortgage refinance solicitations they receive on a daily basis and decide that refinancing their house to pay off their high interest credit card debt makes sense - they do the math and realize they can save a few hundred bucks a month.
This can be a smart move under one condition: They must have the discipline to not max out their credit cards again.
This is the snow-ball effect that has led to a lot of the foreclosures we're currently facing: when the consumer refinances the house to pay of credit cards - the consumer is not paying off the debt, they are only transferring it to another location.
The debt still exists inside their home, now they have open credit cards, and the spending spree starts all over. Take a cruise, buy some clothes and before they know it they have maxed out cards again, and the original credit card debt is hidden inside their home still.
This scenario has created a fragile position for the star couple. If there is a loss of a job or income in their household for whatever reason, there is very little breathing room(equity) for selling the house.
To illustrate further this snowball effect and why foreclosure rates will continue to rise is another common scenario is the "recent home acquisition" in the last year or two with little or no money down. The home owners are forced to sell, but are simply upside down.
They owe more to the bank than what they can realistically sell the home for.
The bottom line is that the banks ends up taking back more homes through foreclosure and the inventory of houses goes up. These homes are almost guaranteed to have work that needs to be done to them and most home buyers want something they don't need to do anything to, so these homes will stay on the market longer than most, eventually bought up by an investor.
The Illinois foreclosure process takes 210 days minimum, from the issuance of the Lis Pendins to the day of the auction. So this process takes time. The snow ball has to build and run for awhile before finally hitting bottom.
How long will it last?
It is hard to predict the outcome of any market or situation, there are many economic factors and variables.
Other fundamental factors that come into play are the unemployment rate, the value of the dollar, interest rates and lending guidelines, and probably more importantly when the the secondary mortgage market rehabillitates.
Secondary Mortgage Industry
The secondary mortgage industry is the group of companies and other consortiums are to buy "bundles of mortgages" as investments from the primary mortgage industry.
What happens is when a bank lends you money they create a mortgage and then "bundle" that mortgage with about 100 other mortgages creating one big mortage that they in-turn Sell to another bank as an investment.
When foreclosure rates go up, a higher percentage of the individual loans in these bundles goes up too. Those investments suddenly end up generating less revenues from the lack of mortgage payments being made.
The secondary mortgage investor then goes belly-up.
Supply and Demand
The fundamentals of supply and demand still hold true. If a bank has less investors buying their mortgages, they in-turn make less mortgages and their lending guidelines get very strict because they are forced to make more conservative loans.
Good credit, stable income, money-down at closing are all necessaties, much more so than a few years ago.
In conclusion, its a cycle. Legislation in 1987 and following economic conditions created a buyer's market like this in the early 1990's and things bounced back in time and it will again now that were experiencing a similar market.
The good indicator to watch for will be once it becomes easier for home buyer's to obtain loans again, real estate sales prices will stabalize and start to rise again.
According to Realtytrac.com foreclosure filings increased 75% from 2006 to 2007.
How did this happen?
Frankly speaking, its part of the cycle. Housing prices and development can't keep growing forever.
2000 - 2005 were booming years for the housing market and the mortgage industry. Residential subdivisions were growing like sea-monkeys all over America.
100% financing with so-so credit was very common. "Adjustable rate - whats that? Who cares, where do I sign!"
Some will say that there are a couple of fundamental factors that led us to this extreme of a situation - namely lack of consumer financial education and predatory mortgage lending.
Another way of putting that is: Some lenders were taking advantage of financially unqualified individuals buying homes they cannot afford. Lenders have certain guidelines they follow to determine if someone can afford a loan. That filter the borrower goes through when an underwriter analyzes the deal, is those very guidelines being checked(and ignored in some cases).
Many borrowers don't take into consideration - and are not properly advised about the monthly note that comes with property taxes, association dues, insurance, PMI, and adustable rates in many cases.
What you end up with is a household spread very thin and the slightest financial turbulence leaves a deficit in the household's budget every month.
The snow-ball effect
Illinois foreclosures and foreclosures all over the US in general have risen greatly and most likely will keep rising, due to a snow-ball effect.
See if this scenario looks familar:
John and Jane Homebuyer get their house in 2000. They 100% finance the house and move in with no money down. Life is great for a few years until they realize that they have so much credit card debt from filling the house with furniture and plasma screens and hardwood floors.
They finally take notice of the dozens of mortgage refinance solicitations they receive on a daily basis and decide that refinancing their house to pay off their high interest credit card debt makes sense - they do the math and realize they can save a few hundred bucks a month.
This can be a smart move under one condition: They must have the discipline to not max out their credit cards again.
This is the snow-ball effect that has led to a lot of the foreclosures we're currently facing: when the consumer refinances the house to pay of credit cards - the consumer is not paying off the debt, they are only transferring it to another location.
The debt still exists inside their home, now they have open credit cards, and the spending spree starts all over. Take a cruise, buy some clothes and before they know it they have maxed out cards again, and the original credit card debt is hidden inside their home still.
This scenario has created a fragile position for the star couple. If there is a loss of a job or income in their household for whatever reason, there is very little breathing room(equity) for selling the house.
To illustrate further this snowball effect and why foreclosure rates will continue to rise is another common scenario is the "recent home acquisition" in the last year or two with little or no money down. The home owners are forced to sell, but are simply upside down.
They owe more to the bank than what they can realistically sell the home for.
The bottom line is that the banks ends up taking back more homes through foreclosure and the inventory of houses goes up. These homes are almost guaranteed to have work that needs to be done to them and most home buyers want something they don't need to do anything to, so these homes will stay on the market longer than most, eventually bought up by an investor.
The Illinois foreclosure process takes 210 days minimum, from the issuance of the Lis Pendins to the day of the auction. So this process takes time. The snow ball has to build and run for awhile before finally hitting bottom.
How long will it last?
It is hard to predict the outcome of any market or situation, there are many economic factors and variables.
Other fundamental factors that come into play are the unemployment rate, the value of the dollar, interest rates and lending guidelines, and probably more importantly when the the secondary mortgage market rehabillitates.
Secondary Mortgage Industry
The secondary mortgage industry is the group of companies and other consortiums are to buy "bundles of mortgages" as investments from the primary mortgage industry.
What happens is when a bank lends you money they create a mortgage and then "bundle" that mortgage with about 100 other mortgages creating one big mortage that they in-turn Sell to another bank as an investment.
When foreclosure rates go up, a higher percentage of the individual loans in these bundles goes up too. Those investments suddenly end up generating less revenues from the lack of mortgage payments being made.
The secondary mortgage investor then goes belly-up.
Supply and Demand
The fundamentals of supply and demand still hold true. If a bank has less investors buying their mortgages, they in-turn make less mortgages and their lending guidelines get very strict because they are forced to make more conservative loans.
Good credit, stable income, money-down at closing are all necessaties, much more so than a few years ago.
In conclusion, its a cycle. Legislation in 1987 and following economic conditions created a buyer's market like this in the early 1990's and things bounced back in time and it will again now that were experiencing a similar market.
The good indicator to watch for will be once it becomes easier for home buyer's to obtain loans again, real estate sales prices will stabalize and start to rise again.
