Why Foreclusures Create Such Amazing REO Deals.

As we all know the number of foreclosures have soared. This is mostly due to two reasons, predatory lending and 100% Financing, or a combination of both.

Predatory lending is when the lender places the owner in a loan that is not possible for them to sustain. For example adjustable rate mortgages that adjust as often as every month. A borrower that is stretching on a $1,800/month payment can't possibly keep up when their monthly payment is increasing a few $100 every month.

But I believe the biggest reason the foreclosure rate is so high is 100% financing. Because of the ways the laws are today, if a home is sold in a short sale, all lenders must agree on a price, and most likely everyone will take a loss. On the other hand, if a home is taken by foreclosure, the junior debts are wiped clean for the primary lender and the bulk of the loss is incurred by the junior lien holders. Because of this it's not really in the Banks (primary lien holder) interest to negotiate a short sale. Let's look at an example.

A house is sold for $500,000 with a 100% financing.
The 1st is $400,000
The 2nd is $100,000

Let's say the market value has dropped 15% giving you a home value of $425,000. In this case a short sale is generally not possible, and the primary lien holder will take over the property and the 2nd will be removed. The lender can then sell the property for the market value and break even including their expenses. You can see why lenders have no incentive to work out a short sale or terms with an existing owner.

This also provides buyers and investors with an amazing opportunity as long as this scenario exists.

BTW, I don't necessary like that the market is set up this way, but I might as well help my clients get great deals as long as it is. I also don't think this will go on forever. It is very likely that Congress will step in and change the laws forcing lenders to work with owners through bankruptcy, so NOW IS THE TIME TO BUY.