Articles: Foreclosure

The rate of foreclosures has risen to historic levels. It was projected that 2 million homeowners will lose their homes to foreclosure by the end of this year, according to the Center for Responsible Lending. The two questions to ask about this financial phenomena are (1) why are foreclosure rates rising and (2) how is this an opportunity to start real estate investing? Here are just some of the answers.

1. Job losses. This THE number one reason that people lose their homes. This is particularly true in the Rust Belt (Ohio, Indiana, Michigan) suburbs and cities.

2. ARM's. An adjustable rate mortgage (ARM) fluctuates with the lending rate. What was at first a very modest home loan made it very easy for someone to buy a home at a rate that was reflected by the then low prime lending rate. However, as the prime lending rate goes up or down with the economy, so does the house payment. A homeowner with an ARM can easily see their payment go from $300 to $400 and upwards within a very short time. Then they can't make their payments.

3. Interest-only mortgages. This is a way the mortgage brokers and bankers have lured people with good credit to take a loan that they eventually can't afford. The lender makes the loan with the home buyer paying only the interest, or even less than interest, then resetting the loan at a higher interest rate and making full payments. Interest-only and adjustable-rate mortgages share a 63% cut of all new mortgages.

4. Lending to poor credit risk individuals. Banks and mortgage brokers have been using the methods mentioned above to lend to people with a poor credit history. These loans are, at best, risky in nature. These home owners have low incomes and little or no health insurance. Of those who required emergency foreclosure help, 40% stated that medical costs were the cause of their problem with being able to keep up with their house payments. So, instead of creating wealth for these people through building up equity and stabilizing their lives, it destroys their wealth building capacity and destabilizes not only them, but the community around them.

Now how is this situation an opportunity? Firstly, an investment in foreclosed property can be rented if you don't sell it. You will be doing the community a service by making sure that the house doesn't set empty, you can make money from the rental, and when the market swings back to a more favorable position, you can sell the property for a higher value. Secondly, you can amass property. This might sound difficult and risky if you have the resources to buy and hold onto foreclosed property. You can then develop it yourself, use it as a tax shelter, or live in it yourself.