Why There is a Huge Increase in Foreclosed Properties in 2008

Posted on October 18, 2008
Filed Under Foreclosures | Leave a Comment

The increasing number of foreclosures is the current hot topic for the media and politicians. Stories of people losing their homes makes for compelling and interesting television. Promising to stop the rash of foreclosures should get a politician a lot of votes. However, neither the media or the politicians are really addressing the important issues of why are the number of foreclosures increasing, when and how did this start and when will it end?

Financial Pressure

People have always found themselves in financial difficulties when faced with job loss, illness, divorce or death. Sometimes this would result in foreclosure but more often the mortgage could be refinanced, savings could be used or the house could be sold to prevent foreclosure. In today’s economy these alternatives are less available.

Too many people were placed in exotic mortgages that are difficult to refinance. Too many homeowners took out home equity loans and ‘maxed out’ their credit cards leaving them with no available equity or credit to prevent foreclosure. As more houses are put up for sale, their value is forced down to attract a smaller pool of buyers. The home becomes increasingly more difficult to sell. All of these factors drive up the number of foreclosures.

Increasing Numbers of Foreclosures

Some areas of the country have been having these problems for several years. Other areas have only begun to notice increased foreclosure in the last year. In some places the closing of a factory and the subsequent job loss triggered the foreclosures. Other areas did not see an increase in foreclosures until the increase in home values finally stopped and banks began tightening lending policies and decreasing available credit.

There is no one single reason for the increase in foreclosures. Home owners are partly to blame for creating for themselves a financial ‘house of cards’ that needed only one piece of bad news to crumble. Bankers and mortgage brokers are partly to blame for allowing consumers to borrow more than they should and selling exotic mortgages in the name of increased profits.

Why This Trend Will Continue

A problem that has more than one cause will require more than one solution. To stop the increasing number of foreclosures will require the efforts of the government, the banking industry and the consumer. The US congress is currently writing the Foreclosure Prevention Act of 2008. This bill is intended to make credit more available at better rates and provide incentives for lenders to delay foreclosure proceedings.

How We Could Prevent This

The banking industry needs to police itself and rewite the exotic mortgages with adjustable rates and balloon payments.
The consumer needs to start making some tough spending choices.
The home mortgage should always come first while the new car or expensive vacation may have to wait.
At the first sign of financial problems, negotiations with the lender must start to prevent foreclosure.

If all of these steps are taken the number of mortgage foreclosures might start to decrease in the first part of 2009. If not, this problem could get much worse and drag on for several more years. The solution will require action by the government, the mortgage industry and the consumer.