As we continue the lowering of prices in the Metro Phoenix area I am noticing more and more the rising of what I call sympathy foreclosures. These are people who are not in financial trouble per se, they have not lost their jobs and have not had a medical emergency drain their finances. Rather, these are people who owe, say $250,000 on a home that is now selling at $120,000. These are people who find themselves upside down through no fault of their own.
The average sympathy foreclosee is finding that it is not worth it to keep their home since it is usually worth substantially less than what they owe on it. At a certain point this particular person sees losing or abandoning their home as the only reasonable choice. Generally I have found that lenders will not actively work to adjust loan terms for a buyer who has made all their payments on time, so these, people (sympathy foreclosee's) end up foreclosing on their home even though they usually have the money to pay for them. It is foreclosure by choice and not by necessity!
If the first wave of foreclosures we saw this year where buyers who overextended themsleves, or the buyer who lost his job or had a medical emergency, the effect is being felt by people who have not had any of those things happen to them. It truly shows the interconnectedness of every neighbor to each other. It seems that many people are talking about abandoning their homes or downright doing it just to get out from underneath them. Short sales are not very successful and banks generally are reluctant to offer loan modifications to buyers who can actually pay for their homes.
Everybody loses in a sympathy foreclosure, the lender loses money, the buyer damages their credit and usually they neighborhoods with many foreclosures are less attractive to buyers due to high crime in some of these abandoned homes. Something must be done, but, with the strict language of many loans it is possible that nothing can be done without making the situation worse.
So for the time being I believe we will see a wave of sympathy foreclosures and with them a further downturn in the housing market.
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Freddy- 5.78% 30yr. fixed rate changes everything. The powers that be must be aware of this.
Interesting term Sympathy Foreclosures. While I can certainly understand why someone would consider this a viable option, as you said, everyone loses in this scenario.
If the bank doesn't get enough to pay off the loan, can't they come after the foreclosee for the deficiency? So if the foreclosee has other income and assets, how are they better off going into foreclosure?
Wow you hit the nail on the middle of the head. It could not have been said any better.
TIM-> As this is legal issue, I generally refer clients to seek out an Attorney. I am not sure if they are better off or not foreclosing, however, many believe that it is their best option and are doing so in droves!
Brett->You are right everyone loses in this scenario!
Susan-> Thanks for that, I know many of us are witnessing this issue and it must be difficult to know how bad the market may have to get before it gets better!