What is the cause of foreclosures? Economy, mortgage meltdown, other? The answer is all of the above and more. There is a 2nd wave of foreclosures coming as delinquent mortgages have increased tremendously in 2009 vs 2008. While this is unfortunate for many homeowners, this is incredible for investors who can cherry pick from the tremendous supply of properties for sale.
1. Negative Equity – Many homeowners are underwater or they owe more than the property is worth. This problem could get worse when the 2nd wave of foreclosures hits, interest rates increase and banks continue to be tight with lending. Loan modifications are helping, but very few qualify.
2. Unemployment – Unemployment and the economy have caused many to lose or take substantial income reductions making it hard for people to pay there mortgages and bills.
3. Subprime FICO – It not only takes excellent credit but high income, plenty of cash and assets and strong debt to equity ratios to get a loan. People without one of these have a really hard time getting a loan, refinancing and often lose their home.
4. Mortgage Reset – Interest only resets and ARMs are raising mortgage payments when homeowners often cannot pay their mortgage at the existing rate and payment. More mortgages will become delinquent and foreclose due to this reason.
5. Shadow Inventory – How many people do you know that want to sell but cannot or will not because they will not get what they owe or what they want? Once the real estate market stabilizes, homeowners will flood the market with their homes that they wanted to sell for years. This inventory has been building up for a few years and may continue for 3-5 more years vastly increases supply of for sale properties.