Foreclosure: How it Happens and what it Means for Investors

2006 Foreclosure Market Happenings

• Related Articles:
  • What is a Foreclosure?
  • Guide to Buying a Foreclosed Home
  • What is a Pre Foreclosure?
  • Fact and Fiction About Foreclosures
  • The Foreclosure Process for Your State
  • Foreclosure: How it Happens and what it Means for Investors
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Surely someone in 2006 came out with a bumper sticker that says “Foreclosure Happens”; because the year represented one of the greatest surges in foreclosure filings in recent history. Throughout the entire USA, there were approximately 100,000 foreclosures in process during any given month. Several factors contributed to this remarkable and astonishing trend, and the most important economic force was the rise in interest rates on mortgages.

The Cause: What precipitated the current foreclosure market?
During the last USA real estate bull market, prices soared, and the inflated cost to buy a home inspired many borrowers to take out loans that offered the best short-term payment plans. While gaining lower monthly payments and qualifying for larger loan amounts through such strategies, these consumers – and there were millions of them – assumed greater risk as their trade-off.

The most popular loans were so-called interest only mortgages and ARMs. Interest-only loans allow the borrower to repay only the interest, so the amount owed on the balance of the loan can stay the same, even after years of timely payments. Adjustable rate loans – or ARMs – often begin with extremely low introductory rates and payments, but are later adjusted to keep up with changes in prevailing rates. Many homeowners with ARM loans saw their monthly payments jump dramatically – in some cases increasing 50-100 percent – within the past two years, even as the resale value and equity of their homes fell.

From Late Payments to Repossession
While homeowners got caught with increasingly expensive loans, lenders were hit with a spike in unpaid mortgage installments. Customers stopped making their payments, leaving lenders holding the bag.
But when a mortgage is signed, it contains legal clauses that allow for the lender to take legal action if the borrower defaults on payments. The party borrowing the money must agree to make full payments on time, and also agrees that the lender can take the property as collateral and sell it to recoup losses, in the event that payment obligations are not met.
If you miss a payment or two, lenders send a “notice of default”. Unless all past-due and current payments are paid, the lender proceeds with more serious steps that eventually lead to repossession of the property through action known as “foreclosure”.

The entire process can happen within a matter of 60-90 days, and then the lender sells the property to the highest bidder at a public auction, using the proceeds from the auction sale to pay itself back for the loan that went into default.

Cause and Effect: Foreclosure Opportunities for buyers and investors.
Generally speaking, properties sold at foreclosure auctions are deeply discounted. Foreclosure sales are the “going out of business sales” of the real estate business, and they often represent below-wholesale prices and significant savings.
For this reason, people interested in buying undervalued property track foreclosures, looking for buying opportunities. By browsing listings posted on prominent foreclosure sites like Foreclosurefetcher or Bargain Homes, one can immediately detect trends, analyze property details and statistics, and contact sellers.
Doing this research and legwork without such resources is not only expensive and time-consuming, but also prohibitively slow. Undervalued properties are snatched up quickly and “knowledge is power” when it comes to new or emerging foreclosure listings.

REO Listings
Sometimes the auction does not result in a sale. But lenders are not in the business of being landlords, so banks and mortgage companies will hand over their reclaimed property to a real estate broker to list and sell it. These properties are known in the industry as “REO” properties, which is short for “Real Estate Owned” by lenders.
Buying REO foreclosures is somewhat easier than buying at auctions, because it is just like buying any other property that is listed by a Realtor.  And buyers of REOs frequently negotiate with the lender-owners for discounted closing costs and attractive financing. Lenders are generally enthusiastic to offer such perks in order to expedite the sale and get the foreclosed house off their books.
Nationwide foreclosure listing and data tracking services such as Foreclosurefetcher.com provide evidence to confirm that this is one of the hottest foreclosure markets in history, with the phenomenon promising to expand considerably into 2007.
As tens of thousands of mortgages now

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