1. The chaos in the sub-prime lending market. The buyers in this market are often first time and less experienced home buyers with marginal credit and borderline incomes. Quite often the non conventional types of loans, Adjustable Rate Mortgages (ARM's) and other "flexible" loan products, that has become increasingly popular for lenders to use with this type of purchaser over the past several years hasn't been sufficiently explained to or understood by the buyers.

This year, an estimated 1.3 million ARM’s that were taken out during the recent housing boom will be reset and many homeowners will see their monthly mortgage payments shoot up by as much as 50 percent or more.

Many homebuyers were not properly informed or may have thought that they would be able to flip or refinance their houses quickly and avoid the rise in their mortgage payments. Now, in a buyers market with correcting real estate prices, many of them are finding themselves stuck in a house they can no longer afford. Unable to pay their mortgage, many in nearly every income bracket may soon be forced into foreclosure.

2. Predatory lending practices by unregulated mortgage lenders in Colorado. Until January 2007 Colorado had no regulation of Mortgage Lenders whatsoever. Anyone, including someone who had just been released from prison or been denied a real estate license because of a failed background check, could become a mortgage lender Colorado. Even now, Colorado only requires the mortgage lender "register" with this state by having a fingerprint check. Though the Colorado Legislature is currently considering proposed legislation to rectify this, the best way to protect yourself is to know what questionable practices to look for, check with the local Better Business Bureau and interview at least two lenders.

I will be addressing predatory lending in a later post.

3. The decline in home sales. This is a self-feeding cycle where we see an increasing number of homes on the market due to a decreasing number of eligible buyers as the result of tightening in the sub prime lending market. As a result of competitive market conditions, sellers who may need to sell their homes quickly to avoid a default or foreclosure find themselves trapped into needing several months to sell their home, and most likely at a lower price, if they can sell it at all.

Foreclosure investors and buyers looking for bargains can step into these difficult situations and often negotiate a bargain purchase that helps the homeowner avoid a tarnished credit history and helps the foreclosing bank avoid the tens of thousands of dollars it can cost them to foreclose on the property. One way to negotiate such a deal is through a short sale, where the foreclosing lender agrees to a lower amount than is owed to pay off the mortgage.

Negotiating a short sale with a lender or servicer can be a frustrating and time-consuming process. Additionally, investors looking to make a non-owner occupied investment need to bear in mind the current local market conditions lest they end up with a property that will not sell for the amount needed or a rental that will not cash flow.