The F Word
Creative financing, rising interest rates and a sluggish real estate market may be creating a financial hardship for some over-leveraged homeowners. Mortgage delinquencies are increasing for the first time in years. Lenders are carefully reviewing their loan portfolios to determine the risk of potential mortgage defaults and federal loan guidelines are becoming more restrictive. So what’s up with that?
Foreclosure is a legal process whereby the lender receives title to the home if the mortgage payments are not made as agreed. The process will usually take four to six months. The first indication of a potential foreclosure is when the lender doesn’t receive the monthly payment from a borrower. One missed payment usually doesn’t warrant much attention but when a lender doesn’t receive the second month’s payment, a process is activated that could eventually lead to a homeowner loosing the family home.
Every large mortgage lender will at any given time have a few delinquent loans and foreclosures in progress. The percentage, however, is low (usually under 5 percent) and in the last four years foreclosures have been nearly non-existent. The real estate market has been so good that nearly all borrowers who run into extreme financial difficulty have been able to sell their home quickly. Lenders and their federal regulators carefully monitor the percentage of delinquent loans. An increase of only a few percentage points could be a warning signal for a troubled housing market. Having one or two foreclosures in a neighborhood has a negligible effect but several can destabilize a community and lower property values.
DataQuick Information Systems reported a disturbing number of homeowners have recently gone delinquent on their mortgage payments. During the first quarter of this year, Sacramento County had a 49 percent increase in “default notices” sent to borrowers, Placer County had a 90 percent year over year increase during the same time period and California registered a 29 percent increase in first quarter mortgage defaults with 18,668 registered filings.
The most common personal/financial reasons provided to lenders by delinquent homeowners are: job loss, divorce and severe illness of a family member. Nobody tells a lender that they spent their monthly house payment on a vacation in Cabo San Lucas. Once a homeowner becomes 2 months delinquent, it becomes increasingly more difficult for them to “catch up” their back payments from their own financial resources. A delinquent homeowner usually must find a quick infusion of cash to bring the delinquency current or attempt to sell the property and salvage any remaining equity.
While most defaults are the result of personal tragedies, an increased number of homeowners are experiencing a hangover from that all too attractive, adjustable-rate mortgage (ARM). ARMs have been the loan of choice for more than two-thirds of all area homebuyers financing their purchase. The initial low interest “start” or “teaser” rates are beginning to expire. Interest rates on home equity loans have also jumped from the 5 percent range to over 9.
First time homeowners are five times more susceptible to getting behind on their mortgage. Many stretched themselves financially to buy their first home, they have limited cash reserves and they are unaccustomed to managing household expenses.
Despite occasional financial uncertainly, ninety-five percent of all homeowners make their monthly payments on time. A few will find themselves faced with over-whelming financial hardship and regretting their decision to purchase a home. It is best, when that happens, to act quickly. If the financial problem is temporary a “work-out” might be structured with the lender. If the problem is permeate it is best to call your trusted agent and discuss selling the home.
Most situations in life are easier getting into than out of. Homebuyers inherently know the benefits of owning a home but occasionally minimize the long-term financial responsibility and the consequences of not living up to the obligation. With a more balanced real estate market, I believe today’s buyers will give more thought to both.
Foreclosure is a legal process whereby the lender receives title to the home if the mortgage payments are not made as agreed. The process will usually take four to six months. The first indication of a potential foreclosure is when the lender doesn’t receive the monthly payment from a borrower. One missed payment usually doesn’t warrant much attention but when a lender doesn’t receive the second month’s payment, a process is activated that could eventually lead to a homeowner loosing the family home.
Every large mortgage lender will at any given time have a few delinquent loans and foreclosures in progress. The percentage, however, is low (usually under 5 percent) and in the last four years foreclosures have been nearly non-existent. The real estate market has been so good that nearly all borrowers who run into extreme financial difficulty have been able to sell their home quickly. Lenders and their federal regulators carefully monitor the percentage of delinquent loans. An increase of only a few percentage points could be a warning signal for a troubled housing market. Having one or two foreclosures in a neighborhood has a negligible effect but several can destabilize a community and lower property values.
DataQuick Information Systems reported a disturbing number of homeowners have recently gone delinquent on their mortgage payments. During the first quarter of this year, Sacramento County had a 49 percent increase in “default notices” sent to borrowers, Placer County had a 90 percent year over year increase during the same time period and California registered a 29 percent increase in first quarter mortgage defaults with 18,668 registered filings.
The most common personal/financial reasons provided to lenders by delinquent homeowners are: job loss, divorce and severe illness of a family member. Nobody tells a lender that they spent their monthly house payment on a vacation in Cabo San Lucas. Once a homeowner becomes 2 months delinquent, it becomes increasingly more difficult for them to “catch up” their back payments from their own financial resources. A delinquent homeowner usually must find a quick infusion of cash to bring the delinquency current or attempt to sell the property and salvage any remaining equity.
While most defaults are the result of personal tragedies, an increased number of homeowners are experiencing a hangover from that all too attractive, adjustable-rate mortgage (ARM). ARMs have been the loan of choice for more than two-thirds of all area homebuyers financing their purchase. The initial low interest “start” or “teaser” rates are beginning to expire. Interest rates on home equity loans have also jumped from the 5 percent range to over 9.
First time homeowners are five times more susceptible to getting behind on their mortgage. Many stretched themselves financially to buy their first home, they have limited cash reserves and they are unaccustomed to managing household expenses.
Despite occasional financial uncertainly, ninety-five percent of all homeowners make their monthly payments on time. A few will find themselves faced with over-whelming financial hardship and regretting their decision to purchase a home. It is best, when that happens, to act quickly. If the financial problem is temporary a “work-out” might be structured with the lender. If the problem is permeate it is best to call your trusted agent and discuss selling the home.
Most situations in life are easier getting into than out of. Homebuyers inherently know the benefits of owning a home but occasionally minimize the long-term financial responsibility and the consequences of not living up to the obligation. With a more balanced real estate market, I believe today’s buyers will give more thought to both.
posted by Ken Calhoon at 7:47 AM
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