Explanantions for increase in Arizona foreclosures

As our nation continues to see an increase in foreclosure rates there are still a lot of people asking "What's causing it?" Basically it all comes down to loan problems. Sure the housing slump plays a role, but the current state of the real estate market only escalated an already existing problem. The loose loan standards of several years ago increased the potential for problems. We can't play a blame game here; lenders did provide the loans but buyers were the ones signing on the dotted line. The emotional rush that came with the 2004-2005 housing frenzy was just too overwhelming; many of those individuals felt they had to get in on the action and by a home then and there.

The American dream is to own a home, and in the first part of this decade a large number of people were able to make that dream come true. Unfortunately many potential buyers went out on a limb and overextended themselves to obtain their dream, and now it's coming back to bite them in the form of loan default. Some of the reasons for foreclosure increases include

- Lending guidelines, which have changed quite a bit in the last decade. Back in the day home buyers were required to put 20 percent down, have a stable income and great credit to obtain a loan. In the last decade all that changed. Lenders loosened their requirements on credit standards so buyers could obtain loans with no money down, lower credit scores and less income. Many buyers were purchasing more then they could afford, resulting in increased defaults.

- "Bad" mortgages, as I'll call them, are a significant reason that so many homeowners are defaulting. These include adjustable rate mortgages (ARMs) which offered low minimum payments, encouraging buyers that might not have otherwise pursued or obtained loans. Though their initial payments may have been low, the loan balance continued to rise, and now interest rates on those loans are resetting at higher rates.

- Home equity is also a contributing factor. Arizona as well as many other states saw huge gains in appreciation in 2004-2005, and many homeowners took advantage of it by cashing out their home equity. Unfortunately there are now a large number of homeowners that owe more then their home is worth, and they can't come up with the funds to make monthly payments.

- Bankruptcy change in 2005 . In October 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect, making it more difficult and expensive for individuals to file bankruptcy. In the past homeowners would file bankruptcy to avoid foreclosure, but the new act makes foreclosure an easier option.

- Declining housing prices will continue to impact foreclosure rates as they feed off the other factors listed above. Homeowners that obtained creative financing like the popular "interest only" loans are finding that their home's value is less then what they owe due to an increased loan balance and the drop in housing prices. Those homeowners that maxed out their home equity are facing the same obstacle.

Only time will tell what will happen with foreclosure rates in Arizona and the rest of the nation. Stricter lending guidelines are already in affect, which is a step in the right direction. As the holiday season get's underway it will be interesting to see the impact our national foreclosure rate and the housing slump will have on consumer spending.