Thursday, December 21, 2006

The Foreclosure time bomb - a new fuse...

I've been preaching for over a year that a wave of foreclosures will be the 2nd of a 2-punch combination done on the real estate market, with the exodus of speculating investors being the first. I believe more people took on Adjustable Rate Mortgages than were in a position to make those loans work. Even worse are the ARMs where the minimum payment required does not cover the interest accruing (negative amortization loans). As the introductory, teaser rates expire and increase to today's market rates (plus a margin), people's required payments are rising. Add to that the fact that interest rates are higher today than they were 12-18 months ago, and the ARM needs to increase even more. People who can't afford the higher payments will get stretched thin for awhile, then be forced to give up. At some point, you can't pay what you don't have.

What I didn't realize was the vast differences between the banks' and the mortgage payment servicing companies' tactics in treating these people. I had always assumed the process was the same for everyone: a grace period with no late fee, then a late fee with no impact on credit, then a flurry of activity while the lender tries to collect, then at 90 days past due they will start foreclosure actions.

This article from BusinessWeek states otherwise. It turns out that each company has their own system; the same set of circumstances might cause one family to pay a small late fee and another family to lose their home!

The article also calls for heavier regulation, as there has been too much reported fraud by the companies involved. The moral of the story: 1. pay your bills on time, and 2. know the details of your own mortgage (read your promissory note).

Read the article on BusinessWeek's web site here.
Read a PDF version of the article here.