Investing in the Foreclosure Market - With Risk Comes Reward

Tuesday, March 6, 2007
Contributed by: Thomas Clayton Feighny

Foreclosure rates are at their highest level in many years and only appear to be rising. RealtyTrac released its January 2007 U.S. foreclosure rates showing an increase of 19% from the previous month and 25% from January of '06. The report also shows a nationwide foreclosure rate of 1 for every 886 homes in the U.S. in January 2007.

These high rates stem from the federal government's effort to revitalize the economy after 9/11. After 9/11 the only vehicle the federal government could use to improve the economy was to lower the price of borrowing money. Starting in late 2001 and thereafter for a period of 3 to 4 years, interest rates reached all time lows. The result was many homebuyers purchased a larger home than they had previously owned because they could afford a larger home due to the low rates.

A large amount of these loans were 5 to 7 year interest-only loans which covered, as the name would suggest, only the interest accruing on those homes during the loan term. Thus, these homebuyers made no advancement towards the principal owed on their homes and only staved off the refinancing of their homes for a few years. Now that many of these interest-only loans are coming due with a large balloon payment, these homebuyers are forced to go out and refinance their homes, only to find that the same low rates with which they purchased their houses are no longer available. The hopeful borrower of the early 2000s is now left holding the bag.

Real estate investors are aware of this trend and jumping into the foreclosure market every day. The problem is that investing in a house that is going through the foreclosure process is not as easy as it seems.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.