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Indications that Foreclosure Woes are not Over – HELOC Resetting and the Depletion of Savings

Foreclosures down from peak numbers, but there are signs foreclosures may spike again.

There is no doubt that foreclosure cases are far down from peak numbers during the crisis.  The economy has improved, although at a painfully slow pace.  The real estate market has rebounded generally and there are even hot markets throughout Florida, fueled largely by international cash buyers.  I’ve written about moving ahead and rebuilding but there are some disturbing indicators of another foreclosure setback in the coming years.

Thousands of homeowners suffering through the early years of foreclosure will no doubt begin to rebuild in coming years and many have already rebounded impressively.  Though we can celebrate signs of optimism and success, it’s worth examining some disturbing negative factors pointing to the conclusion that we’re not out of the foreclosure woods just yet.

HELOC resetting and other factors hinting at a new wave of potential foreclosures.

One issue gaining attention in the media concerns the resetting of interest rates many home equity line of credit (HELOC) borrowers will soon encounter.  A major contributor to the real estate crash and corresponding foreclosure crisis was the leveraging of increasing property values for HELOC cash.  These equity lines were used for a variety of purposes ranging from sound fiscal strategy to wildly reckless speculation.  In 2015, we can expect an initial wave of adjustable rate mortgages to reset with higher monthly payments resulting.  From my experience representing hundreds of distressed homeowners, I can testify that significant segments of the population are getting by financially with little to no margin for error or cushion to absorb even minor increases in their payment obligations.

Further compounding the problem is the persistently high unemployment rate.  The Department of Labor, who generates employment data, and economists tell us that the true rate is always higher than the reported rate because the uncounted masses who drop out from job searching.  Many of our long-term foreclosure clients have been unable to successfully complete a loan modification because one or both household contributors remain unemployed or under-employed to consistently make the mortgage payments.

Another segment of the distressed homeowner population is about to join the foreclosure party late.  They have managed to continue paying over several years of economic crisis by a variety of means, including, unfortunately, by tapping into savings and retirement plans.  The widespread depletion of 401K and IRA accounts to pay the mortgage today has only added to another crisis in the making which involves people unable to retire and others outliving their retirement savings.  In recent months, we’ve had a number of new clients who valiantly did all they could to avoid foreclosure  for years before finally breaking down and defaulting.

HAMP and other forms of temporary relief.

A similar problem to the resetting of HELOC rates is the fact that the majority of loan modifications that helped avoid foreclosure were structured as temporary relief.  Through the federal program, HAMP, and other modification plans, we have seen many lender terms with increasing tiered rates of interest, such as a lower rate from years 1-5, higher for 6-10 and so on.  Unfortunately, principal reductions have not been part of the overwhelming majority of loan modifications.

The next wave of foreclosures will come from those who just can’t take it any longer.

Japan lived through a recession lasting more than a decade in which homeowners became prisoners of their castles, unable to sell and move because of their extreme upside down equity.  I have joined the chorus of many voices, including University of Arizona law professor, Brent White, who have advocated for strategic defaults when carefully considered and under the right circumstances.  It seems America
ns from a much more individualized society are more likely to decide to stop paying on horribly upside down properties before running out of money completely while our Japanese counterparts languish for the good of society.

Whether a default is “strategic” or borne of a literal inability to pay, being upside down makes default more likely.  Although property values have rebounded impressively in recent years, there still remain a great many properties lacking any equity with burdensome mortgage payment obligations.  Unless the economy continues to improve significantly and property values increase  further, we should expect continued waves of mortgage delinquencies and the resulting foreclosure filings.  At Widerman Malek Celebration Law Office, we stand ready to help the next wave of homeowners and investors, as we have helped hundreds before them.