The latest foreclosure figures were released yesterday, and in a word they were ugly. According to RealtyTrac, the leading online marketplace for foreclosure properties, another 120,334 properties nationwide entered some form of foreclosure during the month of November.
Those figures represented a 4% increase from the previous month and a stunning 68% increase over November 2005. There is now one new foreclosure filing for every 961 households nationwide. Greeley, Colorado, has the dubious distinction of being the foreclosure champ, with one new filing for every 155 households.
"‘Defaults, auctions and bank repossessions all trended higher in November, bringing the year-to-date foreclosure total to almost 1.2 million, up 43 percent from the same 11-month period of 2005,’ said James Saccacio of RealtyTrac. ‘With home price appreciation slowing, and even declining in some areas of the country, homebuyers who stretched themselves financially to purchase a property don’t have much equity to work with if they experience even a small bump in their mortgage rate or disruption in their income.’"
Sadly, like most numbers, those figures do little to tell the stories behind the story. One thing is for sure, for over a million households this year, Christmas will be less than merry.
But as this credit-induced housing bubble continues to collapse, the frequency of short sales is also rising along with the foreclosure rate.
That’s because "homeowners" who owe more to their lender than their houses are worth on the market can sometimes avoid foreclosure. They do so by negotiating what is called a "short sale."
As the name implies, a short sale takes place when a lender is willing to take less from the borrower than the ordinary payoff amount. For instance, if a borrower owes $300,000 to the lender but can only get $250,000 in an actual sale, the borrower can try to convince the lender to take the smaller amount as the full payoff.
This is usually only done when a borrower is hopelessly upside-down on their mortgage and serves as way for a deal to be cut that benefits both the lender and the borrower.
As simple as this deal sounds, it is hard to pull off in practice, since lenders are not naturally inclined to let their borrowers off the hook that easily. Before it can be done, you have prove that you are broke. One way to think of it is as a mortgage in reverse.
Instead of proving to the lender that they can afford the property, borrowers must prove that there is no way they can make the payments. Beyond proving hardship, the borrower must also prove the property is worth less than the lien placed against it.
Only under these circumstances will a lender even consider doing the deal. In some situations, however, the short sales do make sense, since the last thing the lender wants is to become the property owner.
After all, their business is lending money, not managing properties. Not to mention the fact that carrying a foreclosed property can be quite expensive over time.
There are other factors that could kill the deal, like second mortgages and private mortgage insurance. But in the hands of an agent skilled in short sales, this option may very well be an attractive alternative to foreclosure.
The short sale is no borrower’s utopia, but it’s not all nightmare either.
As the foreclosure rate continues to rise, these sales will become a bigger part of the picture.
The banking debacle continues.
What is the difference between a simple interest mortgage and an amortized interest mortgage? Which is better?
The two loans are quite different because of the way interest and principal are paid.
In a simple interest loan, the payments of principal and interest are always the same until the loan is paid off. For instance, if a person borrowed $300,000 at 6% for 30 years, the monthly payments would be $2,333.33.
The interest on the loan would be $540,000. So the monthly interest portion of the payments would be $1,500. The remaining $833.33 would go toward the principal. After 360 payments, the note would be paid off.
In an amortizing mortgage, the principal and interest amount changes every month.
An amortization schedule shows the specific dollar amount put towards interest as well as the the amount put towards the principal balance with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.
Because of the structure of the loan, the total amount of interest paid is less than in a simple mortgage, because the lender receives the bulk of his interest earnings earlier.
For instance, if a person borrowed the same $300,000 at 6% for 30 years with an amortizing mortgage, the payment would be $1,798.66 per month for 360 payments.
Over time, the borrower only pays $347,514.57 in interest vs. the $540,000 paid under the simple interest loan.
Which one is better? Well, I’ll let you decide.
By the way. . .
Another sub-prime lender has bitten the dust. Ownit Mortgage Solutions, a California company that described itself as one of the top 15 lenders to homeowners with weak histories, has shut down, citing "the current unfavorable conditions of the mortgage industry."
In a letter to mortgage bankers and other business associates emailed on December 5, Ownit said, "For the past three years, we have pursued a mission to influence the mortgage industry toward increased affordability options for a changing market of home buyers. Change takes time, and we are saddened that the current unfavorable conditions of the mortgage industry did not afford us sufficient time to see our mission through."
They won’t be the last.
Wishing you happiness, health and wealth,
The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage question to email@example.com.