To a homeowner, foreclosure is a shocking experience. When foreclosure takes place, it is extremely costly to the homeowners because not only have they lost their home, they have also lost any equity they may have built up in the property. (Equity is the difference between the true market value of the property and the balance owed and/or the total amount of all liens against the property). Along with the loss of all equity, people losing their property due to foreclosure also lose the amount of their original down payment and any money spent on improvements since they bought the home.

As we mentioned earlier, there are many reasons why property (home) owners find themselves in the type of financial trouble that could result in foreclosure. Here are some of the most common reasons.

1. Economic Downturn

The downsizing of many companies was a major reason for the declining job market in the early nineties. Companies that downsize create employee layoffs and/or changes in job classifications. The economic trend over the last few years has generally required more than one person in each household to work. The combined income created more buying power for the family unit. Company downsizing resulted in one or more family members losing their job(s) and/or a reduction in the number of hours worked by one or more family members. The loss of income created a budget problem for many families, making it hard to keep up with their mortgage payments and other bills.

The downturn in the economy resulted in declining property values. Before the economical downturn in the early 1990s, property values, for the most part, had continually increased. Now, we are again seeing a decline in property values. This decline has created many problems. Lower property values caused an inability on the part of many homeowners to refinance, making them unable to take advantage of the lowest interest rates available in many years. Many homeowners found that they could not refinance or borrow against their home equity to consolidate their debt load (bills). When homeowners lose part of their income due to situations such as economical downturn and the decline of property value, the result, in many cases, is the loss of their home due to foreclosure.

2. Balloon Payments

A balloon payment is the final installment payment on a note that is greater than the preceding installment payments and which pays the note in full. Many homeowners bought during the so-called good times, when property values were appreciating/ increasing rapidly. Sellers were able to sell their homes at two to three times the original cost. Many sellers were willing to carry back a 2nd or 3rd mortgage/ note/ loan on the property themselves. The length of time the seller would carry the paper/ note/ loan would generally be three to five years. The new borrower/ homebuyer usually made interest only payments on the carry back. At the end of the three to five-year term, the entire balance on the 2nd or 3rd loan/ note carried back by the previous owner would be due.

Once the note reached the maturity date at an agreed upon time, the entire sum/ balance of the carry back loan would then be due and payable to the seller/ previous owner. Unfortunately, the property value did not always appreciate/ increase, meaning that the new homeowners could not refinance or borrow enough money to make the payment. The missed balloon payment started the process ending in foreclosure.

3. High Payments

During the late 1970s and through most of the 1980s, home values increased all over the U.S. Many buyers thought the home prices would continue that upward trend. Many expected the property values to continue to spiral upward, and some even expected property values to possibly double and triple. A number of buyers bought properties they could barely afford with the intent to refinance later at a lower interest rate or possibly to sell and capture the profit. Many persuaded themselves that if they didn't buy immediately, they would be unable to buy in the future, when prices were expected to be significantly higher. Some buyers made a lot of money buying and selling properties. However, many others lost their properties as a result of high monthly payments they could not maintain. (Many are in trouble right this minute and need help.) This resulted, in many cases, in foreclosure.

4. Speculation

Many real estate investors bought on speculation. They theorized that buying several properties, and using them as rentals, would make them millionaires in a short period of time. Some did just that, but many others had problems. The lack of experience in managing rental properties, plus the problems accompanying rental properties, became a nightmare for many. The change in economic conditions created additional problems when the renters could no longer afford to pay the required rent. When the rents were not coming in as expected, the owners could not keep up with the loan payments. Other problems included some of the payments on properties being more than the rental income (the rental income was less than the loan payment), creating a negative cash flow for the property owner. Declining property values also created a situation wherein properties would not sell for enough money to pay off the existing mortgage. Foreclosure was frequently the result.

5. Changes in Government

Many changes have taken place in the tax laws in recent years. Some states changed the property tax rules, which doubled and tripled the property taxes for some properties after they were sold to new buyers. If the new buyers were not aware of the tax changes that were on the way, they might not be able to pay the new property taxes, which could have increased by several hundred dollars a year. Other changes were made regarding the assumption of existing loans. Some loans were not assumable at the old lower rates. Some buyers were forced to accept a much higher interest rate than they had expected. Many home buyers discovered they simply could not afford the new payment. Many increased their use of credit cards). Unfortunately, many homeowners soon found the monthly payments on all of their bills - credit cards, home payments, auto payments, etc. - were now beyond their ability to maintain. Again, the result, quite often, was foreclosure.

6. Farm Belt, Poor Farm Prices

Many farms were bought with the thought that land values and farm/ product prices would continue to increase. Frequently, the farm/ product prices declined along with the land values. The farmer had paid a high price for the land and often, the interest rates were high as well. The downturn in the economy hit farmers hard. Lenders decided to reduce their risk by cutting back on advancing funds against next year's crop/ future products, making it very hard for the farmers to financially survive. The result was often foreclosure.

The above six reasons are not the only reasons for foreclosure, but they are some of the most common. Foreclosure conditions have created problems for both homeowners and lenders. In good economic times, foreclosures may not be as costly to the lender as in poor economical times. In good times, they may be able to sell the property for full price and recover their investment/ balance owed the lender. In a poor economy, however, lenders often suffer tremendous losses when they end up with a property. Again, as a reminder, lenders do not like to foreclose; the last thing they desire to have is another piece of property. In poor economical times - in fact, at most times - lenders are very willing to negotiate to avoid complete foreclosure. Quite often, forbearance agreements can be worked out with the lender or lenders.

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