Foreclosures may hammer credit scores

There's foreclosure madness in the air.Neighborhoods are falling victim to foreclosure rates not seen
in years.People are not only losing their houses. They are losing the
investment they've made in their neighborhoods, in their
communities and schools and churches and businesses.There has been a tidal wave of foreclosures across the nation
as ARM's -- adjustable rate mortgages -- are readjusting as
lenders hike interest rates, and house payments are stretching
household budgets past the breaking point.The houses are going back to the bank in record numbers.USAToday recently reported that homes entering foreclosure hit
a record number in the final quarter of 2006.2007 doesn't seem to be faring any better.There's no quick fix, and the government, in true
Katrina-disaster-style-response, has been loathe to be
proactive. Foreclosures rise, and cities fall apart. I warned of the dangers of relying on interest-only loans over
the past two years, the the short-term benefits seemed sweet:
buy more house than you could really afford to buy, and pay
only a small amount at the beginning. The fairytale was that
by the time the interest rates reset, the housing market would
have pushed home prices up 15-20%, and the homeowners credit
would have magically improved, and a simple mortgage refi could
rescue the occupants and save the day.But that's far from what's actually happened.Burgeoning personal debt levels have stymied the ability to
borrow more. Now that home equity seems to be evaporating as
the housing bubble melts down, there's little wiggle-room to
dodge economic catastrophe.Need proof? Here's what USAToday reported: One Georgia
Institute of Technology associate professor of city and
regional planning, Dan Immergluck, said: "The foreclosure
trends are definitely acelerating in middle-income suburban
communities."Later, he's quoted as saying that the homes surrounding a
foreclosed-upon home drop an average of 1.5%. Each. So if you
have a neighborhood of $300,000 homes, and the home next door
goes back to the bank via Dr. Foreclosure, those home EACH lose
approximately $4,500.Start doing the math, and you'll start to see the tsunami
swells forming off on the horizon.The cluprit are the exotic loans marketed over the past 6-7
years. ARM's and interest-only loans. The hype is forgotten
when the bill comes due. More and more homeowners will find
themselves upside down and in over their heads as their home
payments strip their ability to pay.In the end, their credit will suffer. As they accept the fact
that they will lose their home to foreclosure, they will cease
being a homeowner and they will once again join the ranks of
renters. It is interesting to see large rental development
projects being built in major urban areas. The banks see the
need for these rentals because they helped create the new boom
in homeowners-turned-renters.And, once the credit reports of those former homeowners have
been trashed and ruined and their credit scores are hammered
down to new lows, it may take years to get through this mess.Yes, indeed, foreclosure madness wafts in the air. It was
avoidable once. But not now.