Americans Are Losing Their Homes
Understanding why short sales and foreclosures are rising

Risky Home Loans are catching up with a number of homeowners across the United States. Foreclosures rose 45% in January compared to a year ago, and experts don't see that number getting any better in the near future.

The number of homes entering some stage of foreclosure -- from notice of default to bank ownership -- increased 45% in January from the same period a year earlier, according to Irvine, Calif.-based Realty Trac. That was one new foreclosure for every 1,117 U.S. households.

Foreclosures are still low on a historical basis, but it has been rising steadily for the past year, Realty Trac reported. Job losses in some regions were to blame, but so, too, were risky borrowing practices that left homeowners little wiggle room on their mortgage payments. And with the pace of appreciation stalling and interest rates rising, many economists and industry observers expect the pace of foreclosures to accelerate this year.

Rising rates squeeze borrowers
Usually, it's a job loss or loss of income from a household breadwinner that drives defaults. But rising interest rates are also beginning to play a role.

In the last 5 years, many borrowers took out interest-only, variable-rate loans, and in some cases put no money down to afford a house. Freddie Mac estimates one out of every three loans issued in 2005 was an adjustable rate mortgage. Now that we've seen 14 consecutive interest-rate increases since June 30, 2004, many of these loan rates are bumping up, increasing the size of mortgage payments.

Foreclosures had been at historic lows in the past three years as rapidly appreciating home prices gave financially strapped owners the option to refinance, sell their house at a profit or take out a cheap home equity line of credit. But with the pace of appreciation slowing in many markets and interest rates rising, for many, these avenues have been cut off.

Silver lining for buyers
Analysts expect delinquencies to rise, putting a greater number of these foreclosures on the market for buyers to choose from. This is bad news for owners who live in these areas but its good news for buyers looking for some relief from the high prices of the last several years.

The best deals can usually be negotiated with an owner, when a property is in default, but hasn't been put up for auction or turned over to the bank.
Risky business
But foreclosures don't always mean bargain-basement prices.

And there are more drawbacks and risks to buying property at auction. First of all, most buyers will need to come up with 100% of the purchase price on the day following the auction. Second, many times a property can't be fully inspected, and in some states, the previous owner has the right to buy it back for what you paid within a certain period.

It is recommended that buyers educate themselves about the foreclosure process now, so they can be ready to move when they see something they like. Interest rates should continue to remain steady so it is important to be ready and in position to take advantage of any possible opportunity.