Foreclosure filings for the month of January experienced a 17 percent decline over last year, according to RealtyTrac, Inc., which publishes the most comprehensive database of home foreclosures online. But this positive news could slightly mislead consumers. Other background factors are at play. For example, many lenders are currently bombarded with the sheer number of defaulted mortgage loans, not to mention the added pressure of fraud allegations, which has spurred the meticulous combing through of all foreclosure filing documentation. Other aspects of the real estate market to consider when looking ahead are: the resetting of option adjustable rate mortgage loans due this year, increasing unemployment rate, spiking mortgage rates, and decreasing home prices.
After twenty straight months of foreclosure filings exceeding 300,000, January is only the third straight month in which foreclosure filings have been less than that. But this is far from a sign of a housing market recovery. As the Chief Executive Officer of RealtyTrac, Inc., James J. Saccacio, reports in the company’s news release this month, “Unfortunately…[this is] more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork, and formulating legal argument related to accusations of improper foreclosure processing.” Many foreclosure experts agree with Saccacio citing that much of the decline in foreclosure filings can be attributed to foreclosure moratoriums, such as the one issued by Bank of America at the end of last year. States had banded together pressuring lenders to halt foreclosures based on any illegal affidavits that were submitted by the lenders during the foreclosure proceedings. Many lenders had instituted “robo-signers” to sign and approve documents without manually verifying them.
As lenders are scrambling about to avoid the legal ramifications of fraudulent foreclosure documentation, another wave of foreclosures is expected to hit the market this year due to resetting mortgage interest rates of option adjustable rate mortgage loans. Option-ARMs are creative mortgage loans that provide mortgage borrowers the option to defer interest payments, which are then applied to the balance of the principal. This increases the future interest payments through negative amortization. These loans generally begin with an initial teaser mortgage interest rate, sometimes as low as 1 percent, which then increases after a set period of time, such as 3, 5, or 7 years.
Many of the option-ARM loans that were originated toward the end of the mortgage market bubble, in 2006 and 2007, will reset this year at much higher payment schedules, sometimes tripling the amount of the minimum mortgage payments. Moreover, since home prices have decreased and many homeowners are upside down on their mortgages, refinancing the home mortgage is not a viable option. Option-ARM loans were the most popular in California and Florida, with 60 percent and 12 percent dominating the mortgage lending market, according to Credit Suisse group AG analysts, respectively. JP Morgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. are the largest holders of option-ARM loans. Analysts at JPMorgan Chase & Co, developed a model to predict the percentage of remaining option-ARM loans that will default, which is 70 percent. While a significant portion of the problems have been “de-fused” by the Fed’s extremely low interest rates, this shows there is a significant threat remaining.
As if the market outlook is not dismal enough as it is, other market factors only stand to exacerbate the problem. Due to lending fraud allegations aforementioned, many mortgage lenders are tightening their mortgage lending standards making it more difficult for home borrowers to qualify for a mortgage loan. Couple stringent qualifying guidelines with increasing mortgage interest rates further serves to deter home borrowers. As mortgage interest rates increase, home sellers and real estate agents are forced to lower prices of homes for sale in order to spur housing demand. However, their efforts may be in vain; because, to top it off, the unemployment rate is grazing double digits at 9.8 percent nation-wide, not seasonally adjusted. With high unemployment, escalating mortgage interest rates, dwindling housing prices, and option-ARM rate resets, foreclosure filings are predicted to peak at 20 percent this year, according to RealtyTrac, Inc.
Fortunately, opportunity abounds for real estate investors who are financially poised to take advantage of the coming deluge of foreclosures.
By: Vanessa Rodriguez for FreeRateUpdate.com