The Worst Is Yet To Come for Foreclosures

This year, about $30 billion in Adjustable Rate Mortgages (ARMs) had their interest rates reset and the resulting monthly payments were jacked up by as much as 63%. In a worst case example, a person who had a $2000/month mortgage payment, before the interest rate was reset, might wind up with a new payment that is as much as $3,260/month after the reset. That's why the first half of this year saw the rate of foreclosures rise by 15%. People just can't afford the new mortgage payments and still keep themselves above water on all the other bills and those expenses associated with home ownership.

Also, contributing to the high rate of foreclosures is the ever climbing unemployment rate. Both historically and statistically proven, about 45% of all foreclosures are a direct result of people losing their jobs.

But here's some ominous facts that say that 2010 will be the "mother" of all foreclosure years in this country.

First, it is estimated that $67 billion worth of ARMs are due to have their monthly payment rates reset in 2010. This is more than twice the number of ARMs that were schedule to reset in this year (See Full Story). It is highly possible, from this fact alone, that 2010 could see double the foreclosure rate over this year's rate. That means more houses will hit the market; driving home prices down even further.

Secondly, the unemployment rate just keeps rising. Many economists are predicting a 13% (or even higher) unemployment rate for next year. That could mean another 4 or 5 million workers losing their jobs next year. Since nearly half of all foreclosures result from the loss of jobs (See Full Story), 2010 could be a horrible year when there is both high unemployment and ARM resetting. This one-two punch could literally send foreclosures through the roof.

Third, unlike this year, there are a number of ARMs that have 3, 5, or 7-year balloon payments or similarly scheduled loan "recasts" that are due under the contractual commitment of the original loan. Simply speaking, this means that a number of Adjustable Rate Mortgages are set to be mandatorily renegotiated. The problem lies in the fact that the bulk of these kinds of mortgages are as much as 50 percent upside down on on the value of their homes due to the falling of home prices. Because of this, two things can happen. The mortgage lender can demand a massive one-time payment in the tens of thousands of dollars to bring the equity level up on the home before a new mortgage is even renegotiated. Secondly, the mortgage lender might dictate a monthly mortgage rate that is set extremely high because he (the lender) will be forced to realize an abnormaly high risk for a home that has extremely negative equity. As a result, many homeowners with recasts and balloons due will be forced into foreclosure because they won't be able to afford the new payments or come up with thousands of dollars in the equity that is needed to have a new and reasonable mortgage loan and affordable monthly payments.

Lastly, this country hasn't really seen a substantial rise in commercial mortgage loan defaults. But, that could all change next year as businesses struggle to pay their bills against declining business activity. This could result in a potentially high rate of foreclosures against business properties. You can also expect bankruptcies to rise markedly.

While the foreclosure rate for the first half of 2009 was up by 15%, the rate in June 2009 was up 33% from June 2008 and that's a warning that the worst is yet to come.

If you listened to the chief economist on Obama's economic team, Larry Summers, you would have heard him say the Obama economic policies pulled us back from the "brink of catastrophe" (See Full Story).

However, I believe that, unless economic policies are changed, the real "catastrophe" is yet to come. If next year sees the continuation and growth of high unemployment and the foreclosure rates keep climbing, we will fall into an economic abyss that Larry Summers seems to think the Obama policies may have dodged. But, sadly, the Obama administration has really done nothing to effectively stop the rising rates of unemployment and foreclosure. Now, they want us to all believe that they have done their jobs and they all appear to be taking their victory laps.

If all that I have outlined above comes to pass, 2010 could be a disastrous year. Consumer confidence will plummet as the increase in foreclosures will continue to reduce the value of their homes. Bank failures will rise as the foreclosure rate rises. The unemployment rate will be exacerbated by these conditions. And, more Americans will have their dream of home ownership taken away from them. In some cases, forever!