Foreclosure nightmare

Rising interest rates, outrageous energy costs and a sputtering housing market are all blamed on a massive 72% increase in home foreclosures compared to the same period last year.

People just can't keep up with their bills, and it takes just 90 days of missing your house payment before most lenders begin the tragic process of taking your house.
The first three months of 2006 have also seen a big increase compared to the last quarter of 2005, with 38% more foreclosures.

Today, there's a new foreclosure for every 358 home mortgages in the United States.
"Foreclosures have now increased in four consecutive quarters and are on track to go above 1.2 million in 2006," RealtyTrac CEO James J. Saccacio said Wednesday.

That would put one out of every hundred American homes in foreclosure.

But rather than being spread equally across the country, foreclosures are clustered in the same states where the housing boom was craziest: states such as Florida, Nevada, California, Georgia, Colorado and Texas.

Outrageous prices led buyers to risky interest-only or negative-equity loans, most of which jumped from an affordable early payment to a free-for-all adjustable rate after a few years -- those who didn't or couldn't refinance to a safe fixed-rate mortgage are currently trampled by monthly payments that are suddenly hundreds or even thousands of dollars higher.

Georgia is the nation's top loser, with a new foreclosure in the first quarter of 2006 for every 127 households. The rate has tripled since the same period last year.

Next is Colorado, with one of every 138 households currently being taken back by the bank -- a 96% increase from early 2005.

Indiana is in third place, with one of every 165 households entering foreclosure.

Not over yet

Meanwhile, lenders in Southern California have introduced a 50-year mortgage as a "more responsible alternative" to the adjustable-rate reverse-equity loans that still dominate the most expensive housing markets. The average American home buyer wouldn't even live long enough to pay off the mortgage.

Regardless of gimmicky new loans, it seems people are finally backing away from a market that looks increasingly dangerous.

New mortgage applications hit a 28-month low this week, even as long-term mortgage rates dropped a bit.

Refinance loans have also drastically dropped as real-estate appreciation has cooled or even started to reverse. Higher rates make it less attractive to try for a new loan.

Some doomsayers claim a catastrophe is already guaranteed because millions of homeowners refinanced when their property appraised at ridiculous bubble prices.

That means millions of homeowners -- even those with "safe" fixed-rate loans -- already owe more on their house than it will ever be worth again.

Bad for everyone

The U.S. economy is on such shaky ground that lenders are doing more than ever before to make deals with people who can't keep up with their house payments.

"Put yourself in the bank's shoes," said Mory Brenner, a foreclosure attorney. "The person has missed one payment or two payments and you know in your state that if the thing goes to foreclosure, you're going to be looking at getting no payments for a year and a half and at the end of the year and a half, now you're going to have to market a distressed property."

In other words, your lender doesn't want your house, doesn't want to lose 18 months of payments and definitely doesn't want a stockpile of houses in a dead real estate market.
More foreclosures lead to more foreclosures, as people who could otherwise sell their way out of debt (or at least break even) find their property in competition with cut-rate foreclosure sales.

Homeowners who start talking to their lenders before that first late payment are in the best position to work something out and keep their house, Brener told BankRate.com.