Creative Financing Creating Foreclosures

You can't listen to the radio for more than 15 minutes without hearing an ad for mortgages with all kinds of creative financing options. Many people in the last few years, in order to buy homes in the high-priced Southern California housing market, elected to take interest only plans or adjustable mortgages, both of which promise substantially higher payments in later years.

While this type of creative financing might get you into more house than you could otherwise afford, it also might lead you into a situation in which you can no longer afford your monthly payments. According to this report, foreclosures are starting to rise:

The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show.

Lenders sent out 26,705 default notices — the first step toward a foreclosure — during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick Information Systems.

Defaults are still well below their peak level of 59,897, which came in the first three months of 1996, as the state's last housing slowdown was ending. But the report shows that the slumping housing market is taking a toll on more homeowners — especially those with mortgages that offer low initial payments at the cost of higher bills down the road.

"We were putting buyers in homes with loans they could not afford to sustain over the long haul," said Bob Casagrand, a San Diego real estate agent. "If you're a marginal buyer with an adjustable mortgage, you're rolling the dice on the future."

This may mean a lot more inventory on the market in the coming months, which will serve to depress pricing throughout the region. Because prices will still be very high, it may just mean that a new class of future foreclosures will be entering the market.