A Car with No Drivers

Most of the information in this post comes from a study done by the Center for Responsible Lending, in a comprehensive report entitled "Losing Ground."

Of all the loans made in the sub-prime market in 2005 and 2006, nearly two million are expected to go into foreclosure, causing familes to lose a total of $164,000,000,000. That's $164 Billion. with a "B." To make these numbers work, one out of five homeowners will lose their homes. That is a huge rate of foreclosure for any market, even if it is the sub-prime loans that are the focus of this study. And why are these loans expected to have such a high foreclosure rate? The study mentions some of the causes:

The report discusses a number of factors that drive subprime foreclosures—these include adjustable rate mortgages with steep built-in rate and payment increases, prepayment penalties, limited income documentation, and no escrow for taxes and insurance. We also determine that these features cause a higher risk of default regardless of the borrower’s credit score.

These are, of course, some of the very same issues that we have been discussing and warning against for quite some time, most recently yesterday.

Adjustable rate mortgages, huge pre-pays, no doc loans, no escrows, all combined with very little knowledge of the mortgage process for most homeowners. Honestly, how can any mortgage company expect their debtors to pay for loans like this?

Well, of course, they don't expect homeowners to pay the loans, and they are prepraed when the loans inevitably go into default. In fact, they prepare for this from the same day that the loan is funded. The original company that funds the loan immediately sells it to a group of investors, who sell the payment collecting rights to a mortgage servicing company, which keeps their good name out of the eventual foreclosure process.

So how can homeowners stop foreclosure with the odds so highly stacked against them? It may not be easy, but it sure won't be impossible. Homeowners really need to begin learning how their mortgage works, how the foreclosure process works, how money works, and how they all fit together. This is one of the main points of this blog: to educate homeowners on how they fit into the overall economy.

Granted, there is little to no formal education about the mortgage and real estate industry given to consumers. But just because no one is forced to learn, doesn't mean that responsible home buyers shouldn't learn how the products they are buying work.

You're not buying a house: you're borrowing a lot of money to be able to live in a house. You don't own it until the bank is paid back what you owe them. Until then, you are at your creditor's mercy if you miss a payment.

Start taking your mortgage seriously right from the start, learn about the products you are purchasing, and avoid foreclosure entirely. If you can't get a good rate on a loan because of your credit, then try buying a smaller house, or put off buying at all for a few months.

And don't assume that a low rate is a good deal. Look for the trap in the ARM. Don't get used to your low, introductory interest rate.

If you're behind on payments now, learn all you can about how to stop foreclosure, find a trustworthy company to assist you, if needed, and fight back against your bank. Once you know how to stop foreclosure and about where you fit into the overall economy, then you can save your home and, hopefully, never fall into another mortgage trap again.