The first quarter of 2009 saw the highest level of foreclosures in recent history. With over 800,000 foreclosures for the three month period the nation as a whole is in terrible condition and economists anticipate that a second wave of foreclosures is on its way.
The Federal reserve bank of Kansas City's economist Kelly Edminston made the prediction at the Fed's Money smart Day program. "I don't expect the foreclosure problem to get much better in the next couple of years. In fact, it may well get worse," Edmiston said.
Edmonston and other economists are blaming the widening recession, a high lever of unemployment and bad mortgages that were lent via subprime lending to less than credit worthy homebuyers.
The economists say that this wave of mortgages actually goes back to 2005 and 2006. During this period of time it was common place for mortgages to be written with a low variable interest rate. These loans were taken out during the real estate boom and buyers were attracted to these low interest interest only - principal payment optional mortgages.¬† The payments of those loans are poised to reset at much higher levels in 2010 and 2011 and will push their home owners into foreclosure.
The first wave of foreclosures was associated with Subprime mortgages that reset after 2 years instead of five. According to Edmiston, these next mortgage resets will mean even larger leaps in house payments than the subprime mortgage resets that forced one in five subprime borrowers with adjustable interest rates into foreclosure.
The areas that will be hardest hit are those that traditionally have high real estate prices. It is likely that the areas hardest hit with this second wave of foreclosures is California, New York and Florida, where real estate prices tend be the highest in the nation.
The combination of these new loans maturing and the fact that the economy is currently weak, is adding to this second foreclosure wave by pushing traditional mortgage customers into default, Edmiston said. This combination leads him to suspect that the foreclosure problem isn't about to go away.
If you fear that you may be part of this new wave of foreclosures you do not have to jump ship just yet. You do have options.
Get a temporary deferment from the bank - This consists of a grace period provided by the bank. The deferred payments will be attached to the end of the loan. This will not change your payment amount, but rather just give you temporary relief from payments.
Mortgage modifications - These modifications are usually an adjustment to the current interest rate. In any cases what happens is that you take out a mortgage with an adjustable interest rate and after a set period of time this rate elevates, bringing your monthly payments with it. This inflated rate can cause your monthly mortgage payments to increase by several hundred dollars.
A new interest rate provided by a mortgage modification will usually be a fixed amount that is less than the current adjustable rate. This may not necessarily be lower than the original amount of the interest of the loan at time of inception but it will be a rate that is lower than your current rate. By lowering your interest rate, your monthly payments are reduced.
Another method of reducing your high monthly payments with a mortgage modification is to extend the terms of the loan, for instance you may go from a 15 year mortgage to a 20 or 30 year loan. While this will lower your monthly payments it will not reduce the overall amount of the loan and in fact will actually increase the amount of interest paid over the life of the loan.
What method will work best for you will depend on your current situation? You will probably benefit from a mortgage modification if you can afford to make lowered payments consistently. While your loan institution will make the decision as to whether to approve a modification, they are not in the business of modifying mortgages and may have very stringent guidelines for mortgage modifications. As a result you may be well advised to consult an agency that performs negotiations with lending institutions for the purpose of a mortgage modification. ¬†You do not have to be part of the next wave of foreclosures.
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