U.S. Foreclosure Volume at 52-Year High

As we have discussed at length in the past several months, the foreclosure epidemic is real and getting worse here in Florida… and beyond.

In the U.S. as a whole, it is estimated that foreclosures will account for 1 percent of homeowners this year, the highest percentage in 52 years.

That means, on average, that every neighborhood will have someone who is struggling to make his Florida home mortgage payments. It’s hardly unique to the Sunshine State, too. This is why investors are scouring the U.S. for foreclosures and pre-foreclosure properties as investments.

What caused this epidemic? There are several contributing factors with one main factor, that being the rise of adjustable-rate mortgages (ARMs).

In the last four years, ARMs have offered at rates as low as 1 percent. Many first-time buyers found they could move from renting to qualify to purchase a home, and many did just that. This strategy to bring new buyers into the market was a foreclosure disaster in the making. Neither these first-time buyers nor their Florida mortgage lenders were prepared for this major miscalculation.

The general guideline (or debt-to-income ratio) for lending money to someone buying a home is that the mortgage loan payment should not exceed 30 percent of the gross income of the borrower. To use an example, let’s say Larry and Linda have a gross combined income of $2,000 a month. Based on the 30 percent rule, Larry and Linda can afford a condo with a payment of $650.00 a month.

Let’s say Larry and Linda find a home for $200,000.

Using a 1 percent starting rate with a cap of 12 percent they can qualify for the $200,000, with their beginning payment being $643.00 a month. If the lender didn’t escrow the property taxes and insurance, we will need to add about $220.00 a month to that payment of $643.00. Therefore, they are paying $863.00 a month for their home at an interest rate of 1 percent.

Soon enough, Florida home loan rates rise and Larry and Linda’s 1 percent rate expires and is adjusted up due to rising interest rates. With merely a 2 percent increase, their new mortgage payment will be $863.00 a month and adding $220.00 a month for taxes and insurance totaling $1083.00 a month.

Six months later still, as home loan rates continue to creep up, Larry and Linda receive another notice that their mortgage payment is increasing by 2 percent to a 5 percent level (still very low to most people with conventional loans), upping their payment an additional $231.00. So with taxes and insurance they now need $1341.00 a month, nearly double the $643.00 payment they started with 18 months earlier.

It their monthly gross income is about $2,000, they’re probably taking home about $1,500 after taxes. With a Florida mortgage payment at $1341, the situation has become dire.

Unless they are in a market that has seen rapid appreciation, they will not be able to sell their house and clear the loan and pay a realtor’s fee. They most likely will go into foreclosure. This is happening all over the place, and it’s doesn’t look like the trend is slowing anytime soon.

Other factors make it worse yet. Yes, energy costs are taking their toll, but there is a much bigger culprit. Because of the enormous losses incurred by insurance companies in Florida, insurers are asking the state for up to 40 percent increases in premiums. This follows an average 8 percent increase earlier this year.

As Florida home loan rates rise and ARM’s increase, insurance premiums are also going to increase dramatically for some homeowners.