Home foreclosure rates are up nearly 50% over last year

Blamed on rising interest rates and risky loans

The rate of foreclosure among American homeowners seems to be increasing. A recent study shows that the number of foreclosures has increased 45% over the same time in 2005, with Georgia and Colorado leading the country in properties for which their owners cannot make their payments.

Georgia’s foreclosure rate is up a whopping 88% over a year ago, a staggering figure. Part of the problem there is due to increases in unemployment in the Atlanta area.

For the rest of the country, the causes are simple. Interest rates are rising; the Fed has raised the rates some 14 times in the last two years. The rate increases, combined with the fact that many homeowners took out high risk loans to buy their houses, are to blame. In recent years, the booming real estate market has made buying a home difficult in many parts of the country as home prices doubled and even tripled. Buyers with small down payments and average incomes were forced to take out risky loans, such as Option ARM, interest-only, and no down payment mortgages in order to obtain a home loan.

These loans keep payments to a minimum; the Option ARM even keeps payments below the amount required to service the interest that accrues on the loan. The problem with these loans is that as interest rates rise, so do the payments, and the payment increases can be so severe that the buyers cannot afford to make them. Once that happens, the buyer defaults on the loan, the bank forecloses on the house, and the property is sold at auction.

Increases in the number of foreclosed properties tend to cause property values to decline. The more houses that are available in a given market, the lower the prices for those properties tend to be. With foreclosures increasing, there may be a glut of homes for sale in certain markets. And homes sold at auction often sell for somewhat less than prevailing market values.

Of course, the slightly lower prices may be a boon to buyers who have held off in hopes that prices would decline. It is possible, particularly on the East and West coasts, that these properties will be purchased quickly. But the general indicators suggest that the number of foreclosures nationwide will probably increase, rather than decrease in the near future. 

There won’t be much to stop that if the homeowners involved have mortgages that artificially kept their payments low. At some point, the principal on the loan must be repaid, and that applies to interest-only mortgages or Option ARMs, both of which will adjust eventually to include loan principal. Buyers of homes with these types of loans were hoping that the values of their properties would increase, thus allowing them at least the option of selling if the home became unaffordable. With prices dropping, that could become academic, and thousands of homeowners may be forced to simply walk away from their houses.

The dangers of risky loans are still quite real, and anyone considering taking out a risky loan such as an Option ARM, no down payment or interest-only loan would be advised to consider it carefully. With interest rates continuing to rise, these loans become more dangerous by the day.