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The Coming Foreclosure Avalanche (Part 1 of 2)
| | Thursday, May 02, 2002 @ 05:00 AM EDT
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Contributed by: Bill Young
Bill Young Properties
Read more archived articles about Foreclosures
The booming 90's housing market hid 2 fundamental weaknesses.
One was a mountain of consumer debt. The second was ice-thin
housing equity. Those 2 flaws have put into motion a slow
motion Avalanche that will bury millions of homeowners in the
next few years.
Credit card debt rose from a little over $2,000 per household
in 1990, to over $7,000 in the year 2000.
Total consumer debt, including mortgage debt, now exceeds the
average family after tax income!
Ironically, while home prices were doubling and tripling in the
90's, home equity, the market value of the home minus the
mortgage, was falling 30 0uring the period.
How was that possible?
Bankers and mortgage companies abandoned traditional lending
guidelines to engage in an orgy of fee grabbing.
They granted loans to anyone with a pulse to grab the lucrative
fees, points and profits generated by these loans.
Would you believe 1100urchase money mortgages? The banks
were essentially paying people to buy houses!
Then there was the refinancing craze. 125 0.000000e+00quity loans, with
no equity needed! Bankers “knew” their bloated loans would be
bailed out by the double-digit appreciation in the red-hot
housing market.
Over 500f the refinances were “cash out,” meaning that the
homeowner increased the size of their mortgage and took the
extra money out or used the cash to consolidate their runaway
consumer debt. This totally illogical gambit resulted in a
great increase in the total debt of the homeowner, sort of like
forcing a fire hose down the throat of a drowning victim.
It gets worse, much worse. The homeowners had unwittingly
exchanged their credit card debt, which could be discharged by
bankruptcy in exchange for secured, mortgage debt which can NOT
be discharged by bankruptcy.
I guess the banks neglected to inform their customers of this
little known (of course the banks knew!) peculiarity.
Thus, these homeowners have virtually assured themselves that
they will lose their homes when, or if they fall behind on
their debt payments again. Nearly ½ of all American families do
not have $1,000 in liquid savings, making a mortgage default
very likely in case of problems.
So, in spite of a superheated housing market consumer debt was
at unsustainable levels. Average home equity was
Down, due to overzealous bankers and the average family has no
financial reserves; an avalanche in the making!
As the economy slowed, mortgage delinquencies shot up. At
first, the problems were not evident. The strong housing price
appreciation combined with the record low interest rates of the
period, allowed many troubled homeowners to refinance their way
out of trouble. Or, if they were unable to afford to carry the
home, they put it on the superheated market to be snapped up
immediately, saving the distressed homeowner from foreclosure.
In fact, records show that in the last 5 years, only 1 in 20
delinquent homeowners lost their homes to foreclosure auctions.
That all changed in the last year. The crash of the stock
market combined with the recession, let to a dramatic increase
in the once dormant unemployment rate. When the spectre of
unemployment is upon the land, consumer confidence tanks.
In the third quarter of last year, unemployment rose about 15%,
from 4.4 to 4.9% Consumer confidence fell 41%!
People lacking confidence in their economic prospects don’t
spend money on big-ticket items, especially houses.
This signaled the end of househyperinflation. The stage was set
for the avalanche of foreclosures seen during last year,
culminating in record numbers of homes lost to the auctioneer’s
gavel.
Since the recession is still a factor and housing is a lagging
indicator; meaning that its fortunes follow that of the general
market, it appears that foreclosures will not peak this year.
Remember too, the stages distressed properties go through
before getting to the actual sale.
There are literally million of homeowners that are financially
distressed, but not yet delinquent. Many would be amenable to a
fast sale to get rid of their problem before it gets worse, if
you could contact them.
Next, comes the period of mortgage delinquency when payments
are late. This period usually lasts 1-4 months. Although,
technically, the bank can put the homeowner into foreclosure
after 1 month of delinquency, they normally wait until the
homeowner is 3-4 months late. The pressure on the homeowner to
solve their problem grows daily.
Finally, the bank issues a Lis Pendens or Notice of Default.
Now the homeowner is “in foreclosure.” Their plight is now a
matter of public record. The time between the issuance of the
Notice and the date of the sale of the property can vary from
21 days in Trust Deed states to 2 years in mortgage states. The
pressure continues to build and the homeowner is deluged by
foreclosure “investors.”
Then the property is sold at the auction. Many times the
property does not sell and the foreclosing bank takes it into
inventory as an REO property. (Real Estate Owned). The banks
will try to get rid of these properties as quickly as possible
and the saga is complete. Sometimes, but rarely in a good
market, good deals can be made with banks for their REO’s.
The current (1st Qtr, 2002) unemployment rate is in the 5.5%
range but is forecast to climb well above the 6% range,
especially with the impact of 9/11 factored in.
What does this mean to you, the foreclosure real estate
investor?
We believe you will have a once in a generation opportunity to
profit by helping distressed homeowners solve their problems,
if you know how!
Note: Bill is a former bank loan officer. He is currently a personal financial consultant and offers assistance to those facing foreclosure. Find out about more of his Foreclosure Seminars here
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