Foreclosures are rampant in California..why?
Question:
Answer:
Because this is exactly the result that Adjustable Rate Mortgages were made for. Homeowners bought homes with low teaser rates and thought that their income would increase dramatically over the next two years so that they would be able to afford the new payment when it reset.
Banks, of course, knew otherwise. They knew that these homeowners would not improve their incomes dramatically. They knew that some of the homeowners wouldn't even be able to afford the low introductory interest rate.
But they lent them the money anyway, because banks thought that, even if the house goes into foreclosure, property values will keep rising and rising. Then the banks would just have to foreclose on the house and resell it, making an even greater profit. They didn't consider the fact that the market would go down so quickly, though, and they would be left holding a bunch of useless property that they couldn't sell.
This is why the hedge funds that bought these loans are failing now -- the banks aren't receiving the income because homeowners can't pay the mortgage, and they can't sell the foreclosed properties for a profit because property values have decreased. They knew they would end up with these houses, but thought they could sell them at higher prices and make even more profits.
Otherwise, why give a loan applicant as much money as they want, without proving income, assets, or job status? So many homeowners lied on their applications to get more money, as well, which contributed to the problem. Lying about income doesn't mean that the income will suddenly materialize you'll be able to afford a higher payment.
Once payments reset, or homeowners faced a financial hardship, the foreclosures started. And lots of foreclosures meant that the property values would drop and it would be difficult to sell the properties, further decreasing values.
Which is exactly what happened.
Hope that answers your question.
ForeclosureFish
http://www.foreclosurefish.com/...
7 digit homes on five digit budgets. How is that for a reason? They simply bought too much home.
Mortgage companies are crooks!
People can't pay their mortgages.
Go with a fixed rate and take a smaller house!
because people jump into, nonsense no interest financing that they cant afford in the first place. and the average person cant afford the monthly motgage payment that you need these days
Because people had NO money in the first place and purchased homes by stating their income with NO money down. They lived beyond their means and couldn't keep up. Instead of sucking it up, they bailed out and let the homes foreclose.
mortgage rates going up.and that's not right
I have seen this on the news. I believe it is because of the sub-prime loans.
Even some of the most modest homes cost mega-bucks. People are spending disproportionate amounts of their income on their mortgage, and if anything happens---they lose the house.
Over the past few years, the banks were lending money to anyone who could "fog a mirror" per say. Basically there was a way to get anyone a mortgage who wanted one. Also, the adjustable rate is very popular because if gives you a smaller interest to start with however will increase eventually. The foreclosures are due to:
1. The people that the banks were lending to were not really credit worthy and purchased too much of a house and realized they are unable to afford.
2. It is now time for all the adjustabel rate mortages to adjust and they are not adjusting downward! The payment increases sometimes beyond the borrowers means.
Not just in California, all over. I live in S. Florida and it is crazy here too.
Because when the housing boom hit about 4-5 years ago, lenders would grant a $1 million dollar home loan without verifying your income or credit! Just today, a home near me was foreclosed on - the woman earned $30,000 a year, yet was able to get a loan for a $387,000 house! And in another month, most ARM's will rise as the 5 year balloon payment kicks in. A $845/month home mortgage is expected to reach $1450, or higher. Most people can't afford that, so they want out of their loan by trying to sell their house - but there is already (typically) 3 years worth of home inventory already on the market. A house listed for 5 months next to mine hasn't had one interested person even stop to look at it. Of course, the owner paid $175,000, and wants $372,000 for it, but that has nothing to do with it, right? ;)
People in California have always managed to overvalue their property and those cause huge mortgages when someone buys the property, always with the assumption that when they are ready to sell the price will have increased and they will be in great shape. Over the past 10 years until 2 years ago the market overheaded and the prices paid were very high, low interest rates and creditors willing to give loans to people who would not normally qualify (the sub-prime lenders) had a lot to do with this. Everyone wants to blame the lenders and the banks but who bought the house, who signed up for the ARM that they knew was going to increase by 6% = prime over the course of 3 years but they took the teaster rate of 1% for the first year. People have to be smarter, I have a lot of trouble feeling sorry for people who expected to make something for nothing and overbought what they needed and could afford. It's time to take responsibility for your actions instead of blaming everyone else.
A huge part of the problem is that mortgage companies gave out loans to people who really couldnt afford their homes by doing all sorts of creative deals...Like the adjustable arms...Which means the house payment goes up or down depending on the interest rates. Now that the interest rates are climbing (and not even by that much) the mortgage payments are raising.so now the people cant afford them anymore..Then to make matters worse people are trying to sell their homes to avoid foreclosure but there are soooo many houses on the market that its not so easy to sell...
The REALLY scary thing is how terrible the morgage companies are doing --- I work in bad debt and we have found a HUGE increase in morgage company bankruptcies. Even big names. American Home Morgage, Wells Fargo..And now Country Wide is warning they are in trouble.
If youre in the market to buy a house NOW is a great time.And I 'd jump on it quickly before it gets too hard to find a lender. Mark my words..In about 8 months to a year its going to be really hard to get a loan..
They are rampant everywhere.
This is a huge problem and its going to get worse. Im sure you have seen all the advertisements. 400,000 home for 800 dollars a month. These were teaser rates, just like credit cards. They were mostly interest only loans.
Your rate starts at some God Awful low number like 3%. What sometimes isnt explained as well as it should be. That 3% is just what you pay. Not what your rate is, many of them were Neg-Am mortgages. Meaning simply they pay 500 a month but their real payment is 1000 a month. So over 2 years on 150K home they owe 12,000 more then when they started. Now their rate adjusts to what its suppose to be. And their payment goes from 500 to 1200 a month. They think crap..
They go to refinance because they cant afford it but the value of their home has gone from 150K to 140K. They think we can eat 10K we need to get out. But they owe 12K in interest that many didnt know or didnt pay attention. So they are 22K in the hole. They cant pay it, and they cant afford the payment.
Who is to blame? Everybody. The Bond Companies that bought them, The Lenders that offered them, The loan companies that Sold them, the Borrowers for not making a smart decision.
Talk to most loan officers, reputable ones, we saw this coming for years. Our company refused to do them. Im not saying im better then those that did them, we just didnt want lawsuits in the future.
Its extremely sad for the homeowners. But with the foreclousers it lowers everybodies values. It will get worse before it gets better.
83 national lenders that did these loans went out of business in the past 30 days. Capital One's mortgage arm offered them, they closed today. Its hitting small companies and large ones.
And its not just in California.
to put it as simply as possible, what has happened is people have taken out loans for houses that have increasing payments, at first it seems all good because some bank offers you an "interest only" loan or "adjustable rate" loan which will give you a lower interest rate and a lower monthly payment..for a while. here's where things get bad, a few years after you buy your house your nice 1200 dollar per month (or whatever is a nice payment for you) suddenly goes up. reason being is the interest only loans only require you to pay interest for the first few years and nothing is paid on principal when this period ends and you actually BEGIN paying onyour home your payment goes up because now it includes the principal as well, at this point your interest also usually goes up (adjustable rate) so your 1200 dollar payment goes up to say...2000 , every year the interest rises until you reach you "ceiling" but by that time you could easily be paying 2500 per month on a loan that originally had a payment of 1200. people get trapped in this because they badly want to own a home and they really cant afford to buy one. so the banks find ways to make it possible but in reality its only possible for a while until that payment goes up. most cases a person will just assume that they will be making more money by the time there payment goes up , or that they can just refinance but that doesn't always work out, you may owe more then your home is worth and if that's the case and you don't find more income FAST you wind up in foreclosure. i bought my first home a few years ago and i fell into the same trap , luckily i didn't go into foreclosure, my home gained enough value to cover the fees and interest, i did have to sell my home and I'm now living in an apartment again, i think its a sad world when good hard working people cant afford to own a home because of greedy banks and greedy homeowners who think they need to make thousands upon thousands of dollars every time they sell a house.
well that wasn't exactly simple i guess but that's your answer, there losing there homes because banks took advantage of people who desperately wanted homes and the people who wanted the homes didn't use good judgement.
bunch a criminals there!!!!!!
Several factors caused this. One was the prices of homes kept going up, and the belief became you can overbuy into a house now and the rising values would always save you.
Second, because the houses were so high priced, the normal 10%down-prime loans were impossible to get. People needed to get into creative and nonstandard financing
FInally, more and more companies got into the mortgage lending business so there was a huge amount of competition. In 2004 the competition started ofering the low/no doc "liars loans" where people didn't have to prove their income and assets, but paid a higher interest for. Plus instead of requiring 10% down many lenders began offering 100% loans, especially those with cheap "leader" interest rates for ARMS.
The lenders felt sure that even if the buyers defaulted the properties would still increase in value enough to protect them.
Well now there is a rush as thousands of these loans in California, Denver Cleveland and other places have hit the point where the payments have skyrocketed, and people can't make the higher payments. Worse, they always thought they could refinance before the bad hit, but now so many are refinancing and selling that lenders aren't making the creative loans anymore. So fewer people can buy, so many sellers can't sell, nor can they refinance.
It is most damaging in California becauser the price of real estate is so high, but actually the two worst palces for foreclosures are Denver and Cleveland right now.
This isn't just California, this is a national phenomena. This will be incredibly bloody for a couple of years, as many lenders WILL go bankrupt and mortgage money will be hard to get except for those with the best credit.
This is not too different from the S&L disaster of the 70-80s
For information on what went wrong, visit the Mortgage Lending Implode-O-Meter, at http://ml-implode.com. It will list the lenders that have gone kaput - 128 since December - and link you to articles about what is going on in the market. Most mortgage professionals look at that site daily.
For a great article on one of the worst California loans ever - the infamous produce picker who was given a $720k loan on a $15k annual salary - go to http://sfgate.com/cgi-bin/article.cgi?f=... It details the story. The article is sad, funny, infuriating, and fascinating all at the same time. You'll know by the end why the CA market is tanking.
I speak throughout the country to lending groups and this is a topic that is much demand. I always go through the story in the article. It never fails to bewilder the audience.
If the rest of the link did not print, here it is: article.cgi?f=/g/a/2007/04/13/... Get rid of the part that is the same in the two halves and you'll have the right address.
Simply Champagne dreams on a Beer Budget
More Related Questions & Answers...