The Foreclosure Crisis - How it Can Affect You

The American public is currently being bombarded on an almost daily basis about the current foreclosure crisis within the US housing market. According to RealtyTrac, foreclosures are up almost 60% in February 2008 versus February 2007. Although foreclosures are at historical levels, the majority of homeowners and non-homeowners may feel that the current crisis is not affecting them. But is this true?

The current foreclosure crisis is beginning to affect not only those homeowners that can not afford to make payments on their homes any longer. The impact of the crisis is beginning to trickle down to the general public as a whole. Other homeowners are the first group directly enduring the results of their neighbors losing their homes. As the number of vacant homes increases across the country, values of homes have decreased dramatically. The National Association of Realtors (NAR) recently reported that housing prices in 2007 declined for the first time since the Depression. This decrease in housing prices means homeowners are losing a significant portion of their wealth. According to a 2004 NAR report, housing wealth accounts for 36% of the nation's tangible assets, so any decrease in the value of housing dramatically affects the nation's overall wealth. The same report also states that homeownership has a larger affect than stocks on the typical homeowner's finances. Declines in housing prices will affect the average homeowner even more than declines in the stock market.

Does the foreclosure crisis only affect homeowners? Since much of American wealth is tied directly into home values, the decline in home values is causing a ripple effect in the US economy. Since the current housing crisis began in the sub prime market, thousands of housing industry workers have lost their jobs. Many other industries that support the housing industry, such as construction, have also laid off workers.

This ripple affect is extending into the overall economy. Many homeowners were using the equity in their homes to purchase large ticket items such as home appliances, and to payoff credit card balances. The money from homeowner equity is currently severely restricted due to both decreasing home values, and tighter credit requirements. This is directly influencing consumer spending, which has been declining in the last few quarters. Retail sales account for two-thirds of the economy, so declines in consumer spending directly affects everyone.

Many homeowners that purchased or refinanced their homes in the last few years took out adjustable rate mortgages. Some of these mortgages had terms that gave the homeowners relatively low initial interest rates, even if the mortgage was outside of traditional loan guidelines. Now, these homeowners now face much higher payment and interest rates, and because of new restrictions in the mortgage industry, now find that they are unable to refinance their mortgages. Because the values of homes have been declining, some homeowners not only are not able to refinance, but also aren't able to sell their homes for the price they purchase them for.

The foreclosure crisis is even affecting those who are looking to become homeowners. The mortgage industry has seen a steady decrease in the types of products available to potential homeowners. Homebuyers also are facing tighter credit restrictions, and they are having to make higher down payments in order to qualify for a mortgage. Even though interest rates are still at historical lows, and the purchase price in many markets is declining, it is still difficult for some homebuyers to purchase a home.

Both financial institutions and the government are beginning to take steps to diminish the influence of the foreclosure crisis. The government has recently allowed temporary loan limit increases for conventional loan limits for Freddie Mac and Fannie Mae, the quasi-governmental institutions that back most home mortgages in the country. They have also increased limits on FHA backed mortgages, and introduced several initiatives that will allow homeowners to refinance out of current adjustable rate mortgages that would not usually qualify. Financial institutions are also more willing to negotiate with homeowners that do have payment issues, because would rather receive continued payments on a home then have to repossess a property they may not be able to sell.

If you are a homeowner that is facing forecloure, the best policy is to contact your lender. If they are not willing to help, many community organizations and local government institutions are trying to work with homeowners in order to help them keep their home.

Alex Veiga, "US Foreclosure Activity Rose in February," AP Business Writer