It’s all over the news! The housing bubble’s about to burst, mortgage lenders are closing their doors, foreclosures are sky rocketing. But what does that all really mean? And why did it suddenly happen to so many people at once?

A little housing market background: In 2005, the housing market peaked. And guess when I bought? January 2005. With the market on a rise and property value increasing, lenders took an aggressive approach, lending even to the least qualified buyers because they were banking on the value of the home to continue to increase and serve as collateral. To ‘help’ these least qualified buyers, banks were serving up ARM (adjustable rate mortgage) loans. While the initial interest rate is low, in 3, 5, or 7 years the rate typically adjusts up. Directly increasing their monthly mortgage payment. And if your current income situation hasn’t changed, you might be stuck with a payment you can’t afford. So you decide to sell. But low and behold your property value hasn’t increased like you thought it would. On top of that, mortgage lenders are catching on that the market has become riskier so now they’re less inclined to supply credit to would-be buyers. And quite possibly, if your rate has increased significantly, you might be upside down on it (where you actually owe more than it is worth).

This is the procession of events.

  1. You qualified for a mortgage around 2005 even though you had less than stellar credit
  2. You were sold an ARM loan.
  3. By 2007, your monthly payment is more than you can afford
  4. The value on your home hasn’t increased, now you owe more than what you can sell the house
  5. Lending companies tank
  6. Buyers are unable to qualify for mortgage loans
  7. You reduce price and still don’t get any offers
  8. You don’t have the money to refinance your current loan
  9. You start falling behind on your payments
  10. You end up losing your home
  11. The foreclosure market increases, there are more homes for sale than there are buyers

Could all this lead to a freezing of residential lending? Will this reach beyond the housing market into the business systems prompting a recession? Only time will tell. However, there is talk in Washington about the government jumping in to aid homeowners in this situation.

In our neighborhood alone, there are 3 houses in row up for sale, one has now added the “Reduced Price” sign. And the house across the street has now gone on the market. What can you do if you’re in this situation? I’ve recently been hearing about Short Sales on the Suze Orman show and Clark Howard. A short sale is basically where you work out a deal with the lender so you don’t have to go to foreclosure. Foreclosures are costly for banks and you take a hit on your credit report. All of this can be avoided by arranging to sell the house to a 3rd party for a price that is less than what you owe on the mortgage.

The latest U.S. News & World Report magazine featured an article on the foreclosure rate. It was no big surprise to me, based on the economy in my own neighborhood, that Georgia is the second state with highest foreclosure rates! On a metro city scale, Atlanta came in seventh behind Detriot, 4 California cities and Las Vegas.

Who is responsible? I say shame on the lending industry for false advertising. I was literally sold an Interest-Only mortgage. My lender was bragging about all the great features, lower interest rate, if times get rough I have a lower payment due than my 30-yr fixed counterparts. Sounded good to me! Little did I know, I was better of knowing the truth and researching first before I accepted what she was selling me. Granted, I was 24 at the time I bought my first house and didn’t have much experience on my side. Honestly, I didn’t even care to know that much then. It was cool I was getting a house, didn’t need a co-signer and qualified with my own part-time income! The best thing for me to do now is over pay every month so I can start buying into my equity.