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How Do Foreclosures Occur And Why?

"... one problem after another presents itself and in the solving of them we can find our greatest pleasure." -- Karl Menninger

Foreclosures occur when borrowers do not live up to the demands of the original loan agreement. Therefore we can assume that most, it not all foreclosures occur when payments aren't made as promised, and that the foreclosure process centers around finances or the lack thereof.

While this may be summarily correct, it can be just as important to the foreclosure investor to understand the reasons behind the financial trouble. In other words. "why didn't the borrower make his or her payments?". "what caused the borrower to become delinquent or go into default?"

So. why do people fall behind in payments. how do they get into financial trouble? There are several reasons why borrowers stop making their regularly scheduled payments.

All foreclosure "experts" agree on the top five or six reasons. they don't all agree n which of these reasons is most common today.

The Most Common Reasons For Foreclosure Action

Divorce

A few short years ago. divorce was the number one reason for home loans going into default. THAT'S RIGHT. DIVORCE! Within this are several components that contribute to the eventual foreclosure of the home.

Typically, the husband is the breadwinner in the family. If the wife is a homemaker (a profession in itself) there is only one income. When a couple splits up. they both must reside somewhere. More likely than not, this requires two mortgage payments, or two monthly rental payments, or a combination of the two. With only one income, it becomes close to impossible to support the two households.

Typically, the wife ends up with the house. Even with alimony and support payments, this may not be enough to meet all the monthly obligations. The husband can only contribute so much. because he must now support himself independently. Even in the most amiable divorces, there just is not enough money to go around in this one income scenario.

In the dual income scenario. typically the couple is aggressive in their quest for a better standard of living. and having not anticipated divorce. are used to living a style of life that the two incomes can provide. Then comes the divorce and the beginning of two households. What the two incomes could achieve while sharing expenses, is no longer true when the two incomes are separated and required to support the two households.

Unfortunately, some divorces do not end up so civil. If the separation is a bitter one, tensions and emotions may run at a fever pitch. Again, and very unfortunately, people sometimes express their pain and anger by hurting others. even those they love. or in this case. used to love. Anger goes beyond the emotional to the irrational.

In this scenario, it almost doesn't matter how many incomes there may be in the household, because this couple is embroiled in an emotional dispute.

Once the mind-games and other nonsense are over. the only way to hurt the one someone used to love. is by affecting their life in such a way as to intentionally discomfort or disrupt their life style.

This obviously is a LOSE, LOSE situation. Emotions stand in the way of rational thought and behavior. Frequently, no payments are made n the house, the loan goes into default and the foreclosure process begins. This is also known as the "if I can't have it. no one will have it," syndrome.

This is perhaps the easiest reason to understand. When we lose our jobs, we lose our income. One's regular monthly expenses do not disappear with the loss of their job.

The average person who is out of work for an extended period of time experiences how quickly their cash reserves are depleted. For some reason this always seems to surprise most people.

Here's a quick example of savings depletion and what is takes to get back on track.

Let's say your average take-home pay is $2,000 per month. Your regular expenses total $1,800 per month and every month you sock away $200 into your savings account, where your account balance is now $3,600.

In just two short months of unemployment your, savings account has a $0.00 balance, you have no income and the bills are due. Three months after your job loss, you become gainfully employed. That's surely good news. The bad news is. by the time your first paychecks start rolling in. you are almost 30 days behind on your bills. Even at the same salary range. with the extra $200 per month. it will take nine months to get current with all of your bills.

Worse, is that it will take another year and a half to get your savings account back to the $3,600 balance. The total time from job loss to full recuperation is now 21 months!

Job Loss

Health Matters

Today, most Americans do not have or can not afford proper medical care. Over 28 million working Americans either do not have, or can not afford health insurance. Over 55 million Americans have no health coverage!

Rising health care costs have put the insurance premiums, as well as the treatment costs out of the range of many. Even a temporary, moderate illness can cost thousands. Many of us have experienced some type of health problem in our lives. If you have had an experience like this recently, you'll understand how expensive the doctor visits, treatments, hospital stays and medication costs can be.

Extended medical problems can destroy a family's finances almost overnight. Added to this, is that fact that an extended medical problem can lead to loss of part or all of one's income.

Individually, these hardships or losses can be crippling. together they can be devastating. The Economy

Today and for the past few years. the economy has become the #1 foreclosure maker.

Not just the economy itself. but the results of a cyclical economy. coupled with a fast paced real estate market. and the events that occurred from this not so "dynamic duo."

Real estate went through the roof in the late 80's. People bought homes at high interest rates, the economy was strong and confidence was high. This was natural because real estate was appreciating at a fantastic rate and real estate made sense in terms of investing.

Added to this was the relaxing of certain government restrictions regarding lending qualifications and procedures. This allowed lenders to grant even more real estate loans. Most of this new wave of loans was used for riskier real estate investments. In the down-turn of the economy, businesses large and small began down-sizing or closing, resulting in massive lay-offs and unemployment. The real estate market took a "nose dive."

There are global events that affect our nation's economy. Who can forget the oil embargo and the effect that it had no Houston, Texas, Denver, Colorado and other regions of the country?

The Other Common Reasons

Without going into lengthy detail. the balance of common factors leading to foreclosure can be summed up into:

living beyond one's means. relocation. death. financial mis-management. military service. business failure. where individuals may use the equity in their home to finance a business project that fails. interest rates and balloon payments.

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