Understanding Foreclosure
When a household's total debt, mortgage and otherwise, overwhelms a household, homes can be lost. A foreclosure happens when a buyer defaults on his payments for any reason — lost job, hard times, or simple delinquency. And with the rush toward real estate and loose lending practices to facilitate it in recent years, foreclosure has become more common.
When does the foreclosure watch begin? Sooner than you think — it starts when you are late with a single payment. With the level of computerization at the average mortgage lender, all it takes is one missed payment to land you on a watch list. You'll start getting letters and calls almost immediately because a missed mortgage payment is an indicator that all your finances are in trouble.
It's important to know that lenders don't really want to foreclose. It costs lenders a lot of time and money to take back property and then remarket it. Plus, it can be a public relations nightmare as media gets wind of lenders essentially throwing people out on the street. But in the defense of lenders, many delinquent borrowers take the payment process too lightly and are poorly informed as to ways to save their homes.
A 2005 survey by Freddie Mac and Roper Public Affairs indicated that 75 percent of late-paying borrowers said they recalled being contacted by their lenders when they fell into debt, but they gave the following top reasons for not wanting to work out the problem with their loan servicers:
28 percent said there was no reason to talk to their loan servicers or that their servicers could not help them.
17 percent said they could take care of their payment problems without any help.
7 percent said they didn't call because they didn't have enough money to make the payment.
6 percent cited embarrassment.
5 percent cited fear.
5 percent said they didn't know whom to call.
The survey said that lack of borrower follow-up indicated why six in ten latepaying borrowers said they were unaware of a variety of workout options that could help them overcome short-term financial difficulties. At the same time, 92 percent said they would have talked to their servicers had they known these options were available to them. The Freddie Mac/Roper survey found no significant statistical difference in the responses given by white, black, Latino, male, or female borrowers, indicating an almost universal need for more borrower education about workout options and foreclosure avoidance.
A 2001 Harvard Law and Medical School study pointed out that more than half of the personal bankruptcies filed were due to illness and medical bills. Ironically, most of those bankrupted by illness actually had health insurance but suffered financial problems due to amounts not covered by their health insurance or lost income from being off work during the illness.
Unemployment is not a top reason for delinquency, the survey showed. In fact, 80 percent of delinquent borrower households included at least one employed individual, and only 5 percent said someone in their household was unemployed. Only 7 percent of the respondents said they were retired.
If you're reading this book, chances are that you've never applied for a mortgage loan. Why all these warnings about foreclosure? So you'll always have it in the back of your mind if you're close to missing a payment.
