What is Going On in the Foreclosure Market?

[Bryan Casteel]

With a little encouragement from juzamjedi, I am reprinting a recent post from my website:

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Foreclosures are going through the roof and seem to be continuing on towards the moon. A recent headline in my hometown paper points to more gloom-and-doom for Hamilton County Ohio while the Christian Science Monitor reports on conditions on the East Coast.

What is going on? There are certainly many different scenarios that people find themselves in that cause them to have to default on their loan. It appears to me that the convergence of several scenarios has caused the foreclosure rate to jump way up.

First is the sustained period of low interest rates that allowed people to purchase homes that would normally be above their means. These buyers qualified for loans based on payments that may have been artificially low due to an introductory rate or an interest rate buy-down. Bigger homes cost more to maintain and someone stretching themselves to get into the house may be susceptible to losing control after a large financial hit.

Second is the explosion of Adjustable Rate Mortgages (ARMs) combined with the low interest rates. Many of these home buyers did not understand what they were signing up for when they agreed to a 1, 2 or 3 year ARM product. Many of them did understand but thought they would just refinance before the adjustable period kicked in. Now these rates are starting to become adjustable and the monthly mortgage payments are increasing severely.

Third is the large increase in