Foreclosure has become an outbreak affecting an entire nation. Realtytrac just reported in the month of April 2011 that one in every 593 housing units received a foreclosure filing. (N1) That statistic is for just one month! Some states such as Arizona, California, Florida, Michigan and Nevada continue to be plagued with an influx of homes falling victim to foreclosure or some other form of default. Each home that is a casualty to a foreclosure, short sale or even bankruptcy is secured as collateral for the lender holding the promissory note. The consequences tend to come at a cost for the lender selling the property but a deal for the buying investor. The costs incurred and the losses experienced by the affected financial institutions have resulted in evaluating their business models to account for the realized risks that these foreclosures have caused. Governing financial agencies are implementing and enforcing new regulations to mitigate further losses for financial institutions and ultimately protect the consumer. The losses caused by the outbreak are shaping a new environment for property finance.
Causes for Default
Lenders review the applicant(s) to decide if they will qualify for the loan. This process takes into consideration the borrower’s ability to repay the mortgage. The lender will look at the person(s) past credit history, employment history, and income to debt ratio to determine the loan repayment capacity of the applicant(s). There are many reasons why a borrower may fall behind on their mortgage payment. The following are some examples of common causes that ultimately lead to default on the mortgage loan.
1. Job loss: A doctrine of American law known as at-will employment defines the relationship between an employer and an employee. The employer can terminate an employee’s employment for good cause, bad cause or without cause and the employee is free to quit, strike, or otherwise cease work. (N2)
2. Decrease in income: Examples of different pay structures that are prone to a reduction in income includes but is not limited to the following: hourly wages, commission, self-employment income, overtime, bonus, or a mandatory furlough.
3. Medical reasons: A person could be hurt in an accident or have a medical condition that would damper his or hers ability to work. As a result of the medical situation, the person may incur excessive medical bills which could further affect the ability to repay the mortgage.
4. Increase in expenses: Expenses associated with owning a house can increase over time. Housing expenses include: property taxes, homeowners or hazard insurance coverage, homeowners association (HOA) dues and/or special assessments, and utilities. Basic personal expenses such as food, clothing, and travel can also increase based on supply and demand for the product.
5. Excessive spending habits: Not everyone is budget savvy. Some individuals let their wants or desires drive their...