Foreclosures on the rise in the South

Real estate investors looking to cash in on foreclosures note rising foreclosure rates around the South:

A six month housing market analysis reveals Tennessee is moving "up" the list of Top Ten states for mortgage foreclosures for the past six months.

The state ranks seventh for all of 2006, with Georgia coming in first for the year and second for the month of June, according to newly released study from Foreclosure.com.

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According to the Foreclosure.com 2006 Mid-year Market Analysis, Georgia ranks highest among states in foreclosure rates to date in 2006, followed in order by Indiana, Colorado, Michigan, Texas, Ohio, Tennessee, South Carolina, North Carolina and Utah.

Another report says Florida and Georgia are "foreclosure hotspots", and cites what some might consider predatory lending practices as partially to blame:

"This time around, however, the situation is exacerbated by the widespread use over the last five years of exotic mortgage products such as so-called option adjustable rate loans with very low start rates and high negative amortization. People bought homes they really couldn't afford, and now they're losing them as these loans reset to market rates and they can't find affordable refinancing options," Ms. McGee said.

Yet another report cites growing problems with "piggyback mortgages", or so-called "suicide loans":

According to Gill, piggyback mortgages, which are a combination of two loans packaged together and closed simultaneously, represent just one of many non-traditional mortgages that have put homeowners at risk of losing their homes.

Typically for people with little or no down payment, the amount for the first mortgage is set so it does not exceed 80% of the home's value. This allows the borrower to avoid paying Mortgage Insurance (MI). The remaining loan amount is financed as a second mortgage by way of a Home Equity Loan or a Home Equity Line of Credit and "piggybacked" onto the first.

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According to SMR Research, lenders and mortgage brokers whose commissions are based on loan size, have aggressively promoted these loans because the first-lien portion of piggybacks tends to be larger than standard first mortgages.

Gill warns that borrowers with these loans should be ultra concerned because they are concentrated in metropolitan areas with the greatest risk of experiencing a fall in housing prices.

"If borrowers start to go into default in a declining property market, they will be committing financial suicide by having their credit destroyed and still being burdened with a debt well after they lose their homes," said Gill.

Which serves as a reminder that check cashing services and payday/title loans and the like targeted at the working poor aren't the only forms of predatory lending. Middle- and upper-middle-class homebuyers are targets, too. The flip side of that is that consumers need to make themselves better informed so they can make smarter borrowing decisions.