Is there a business in fending off foreclosure?

I’m not talking about information web sites; non-profit counseling; or even paper-trail, red-tape navigating credit repair companies.

I’m talking about those things as a part of a larger whole, primarily based on financial service. These days, foreclosures are on the rise, and that probably won’t go away as mortgages are more easily attained today. Even with the shakeout of overly aggressive mortgage companies, there will be a large segment of these companies that will tolerate a higher risk profile…because there is profit in risk.

Because of this risk tolerance on the side of the lenders, the natural fallout is an increase of borrowers who face foreclosure. Plus, because of natural fluctuations in the market, interest rates vary. Many borrowers accept mortgages whose interest rate varies due to the market; some borrowers even accept mortgages with a built-in adjustment (which is effectively just a discounted monthly payment for a while until the real “monthly nut” starts becoming due.

Of course, this deferring fatter payments leads to problems.

You also have the issue of property taxes. Property prices are rising, and so do corresponding taxes. Different states tax property at different levels, so this is most problematic in states with high property taxes. This would be a bigger issue, except for the fact that if the home value really is on the rise significantly, this turns into a benefit to the borrower because they can either refinance and reap the benefit of that increase in value, or they can sell with a profit. Then again, borrowers that are the most likely to foreclose probably aren’t in real estate for the investment.

So, where am I going with this? Well, if you have a trend that increases a ‘definable’ population, you generally have a business opportunity of some sort. If my hypothesis that we are going to have an increasing population of ‘endangered borrowers’ is true (which I don’t have enough data to conclude, only hypothesize), then there’s probably opportunity.

One example is co-investing. Let’s say a Borrower Bob has a $200,000 mortgage. Can’t afford it. Going broke. Let’s say the house is worth $200,000. Let’s say Joe Investor wouldn’t mind buying that house whole as an investment. Borrower Bob doesn’t want to sell whole, or maybe he does, but would like to live in the house and pay rent. Maybe the two can work something out. For example, maybe Joe Investor does buy the house whole, but let’s Borrower Bob rent for 12 months at a discounted rate. Maybe Borrower Bob can even buy the house back from Joe Investor at the end of the 12 months at a price that compensates Joe Investor. Or maybe from the beginning, Joe Investor only buys half the house. But if Borrower Bob can’t make the payments on his half, Joe Investor will take on the whole thing and Borrower Bob moves out, happy to be out from under the mortgage he now knows was way over his head.

These are scenarios. Maybe one or more of the above doesn’t work. Maybe none of them do. Just a brainstorm. My primary thought is there are a lot of people on both sides of this equation. Lots of borrowers in trouble. Lots of investors (individual and institutions) that invest in real estate. Seems like a market.

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