Worldwide Success

As the subprime loan mess continues to unfold, US homeowners are increasingly failing to keep up with their mortgage payments.  According to RealtyTrac, a mortgage research company, the number of foreclosure filings increased by a whopping 68% in November compared with the same month a year ago.  You must have heard of the Millionaire Next Door.  Say hello to the Homeless Next Door.

Many homeowners signed up for adjustable rate mortgages about two to three years ago in order to take advantage of teaser rates.  These loans may initially look attractive because of their introductory low rates, but you need to be ready for the eventual possibility that the rate will reset sharply higher after a certain period.  That is exactly what is happening right now.

More and more homeowners find themselves between a rock and a hard place.  The main problem is that many adjustable rate mortgage owners are in a situation where the value of their home is currently worth less than what they owe to the bank.  If they can’t afford the monthly mortgage payment the only real option that they have it to default and let the bank foreclose on the house.  As more homes go into foreclosure, more pressure is put on home prices, which in turn forces more homeowners to foreclose, causing a snowball effect.  It is not a pretty picture.

Forty three states have seen an increase in foreclosure filings in the past year.  And the worst is yet to come.  There is another group of adjustable rate loans that are due to reset in May and June of 2008 that will force another number of defaults in the fall.  About two million loans are due to reset in the next six to seven months, and that is sure going to create another wave of foreclosures, perpetuating the current problems, and likely driving the economy into a recession.

The ten states with the highest foreclosure rates in the US are listed below in descending order: 

1. Nevada
2. Florida
3. Ohio
4. California
5. Colorado
6. Michigan
7. Georgia
8. Arizona
9. Indiana
10. Illinois

If you live in one of these states, you should expect things to get worse before they get better.

Who is responsible for this mess?  Were careless homeowners at fault for purchasing homes they knew they couldn’t afford?  Were the lenders at fault for being too lenient in lending money to people they knew were not able to pay back?  Was it the government’s responsibility to regulate the mortgage industry more closely?  Or was it Wall Street’s greed that caused this problem due to the packaging of residential mortgages into marketable securities?

An even more interesting question might be how this will get fixed.  Should the government step in and bail out homeowners in default?  Is it fair that responsible citizens have to pay with their tax dollars for the irresponsible behavior of others?  Many questions remain unanswered.

Perhaps one should look at this from an opportunistic stand point.  Given that real estate is a good investment in the long run, people that have good credit may have an opportunity to get in the real estate market at a time when things are looking bleak and consequently prices are low.

I wouldn’t jump in just yet.  There is likely going to be further price deterioration before things get back to normal.  But once prices stop falling, you may have the opportunity of a life time to buy real estate at a low price.

It is sad to see so many people lose their homes.  May this be a lesson to all of us on how the lack of proper financial planning can ruin one’s life.

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