- Divorce – Most people count on two incomes to pay for the mortgage. When a couple separates all of a sudden there are two homes to pay for instead of one. On top of that there are attorneys to be paid and it all doesn’t happen quickly.
- Prolonged Illness – Medical bills along with lost income is a recipe for disaster.
- Employment Problems – When you lose your job and don’t have enough savings you have to choose what bills get paid.
- High Loan Balance – Mortgage money is easy. Between a first loan, a second loan and a home equity line of credit many people have used their homes as an ATM machine. When the time comes to sell, they do not have enough money left over to pay selling fees and are forced to try to sell for a price that is above the market value. When it does not sell, many times it is too late and the Sellers are forced to move on. sometimes it is easier to leave the house with no equity than it is to delay your life or make double payments.
- Adjustable Rate Mortgages – When the adjustment takes place the payment becomes more than what they can afford. Sometimes the payment increases by 40% or more. However, most people right now are able to refinance into a fixed rate mortgage for around 6%, which should be able to mitigate the increase.
Each situation is different but the main reason we are seeing foreclosures now is that home values have not risen. When home prices are rising bad decisions do not become disastrous decisions. I remember locally when our appreciation rates were annually around 20% homeowners were spending taking out equity loans to go on vacations, buy cars etc. As long as the prices kept rising they were dumb but okay. In our market there are areas that have been selling for the same price for the last five years. A high mortgage balance and a slow market does not allow homeowners to liquidate their bad decisions. They are stuck. In the end the underlying reason for most foreclosures are stagnant or declining market values.