The Atlanta Journal-Constitution reports that foreclosures in the 13 county metro Atlanta area are up 29% in 2007 as compared to 2006. In 2007, there were 58,076 foreclosures, which is equal to around 4,900 foreclosures per month. Note that these numbers only refer to the metro Atlanta area, not Georgia as a whole.
By contrast, in 2001, there were just over 20,000 foreclosures in the metro Atlanta area.
What has caused the metro Atlanta foreclosure rate to triple? From my viewpoint, the mortgage industry has created this situation by creating one junk mortgage product after another. Mortgage loan originators have a vested interest in writing loans – these loans are usually bundled and sold as investment products. Therefore, it does not really matter if a homebuyer is truly qualified – as long as there is some way to write the loan, the originating lender is happy, the mortgage broker is happy and the first line of investor is happy.
For example, a prospective homeowner who earns $85,000 might qualify for a $200,000 loan at a fixed rate payable over 30 years, coupled with 10% down. That same prospective homeowner might qualify for a $250,000 loan with a teaser rate of 2% for three years then adjustable thereafter.
The loan originator will have long sold the loan before three years are up and when the loan adjusts, the monthly payment may go up $200 to $400 per month.
Homebuyers naturally look for ways to afford bigger and newer homes and easy money makes it easy to get in and drives prices up.
Until recently, a cash strapped home buyer could at least try to sell, even it meant just getting out. Now, the investment community has dicounted these packages of underperforming loans, meaning that new money is tight and home prices are being squeezed downward. Thus, we have a foreclosure “crisis.”
The AJC story further reports that many of the loans in foreclosure have not adjusted recently at all – as the Fed has kept rates stable or down. When more adjustable rate mortgages begin adjusting up, the current foreclosure situation could get much worse very quickly.
My advice to homeowners who are struggling to pay their current mortgage loans is to downsize as soon as possible. Chapter 13 has become a much less viable option and it won’t help if you have an adjustable rate mortgage anyway.