Why Legacy Mortgages Still Boost Foreclosure Totals

Legacy Mortgages Still Boost Foreclosure Totals The mortgage meltdown ended in 2008. That’s a long time ago and yet it is the loans from mortgage lending’s go-go era from 2000 to 2008 which continue to screw up the real estate market even today.

No, certainly, we are not seeing the foreclosure levels which dominated the marketplace once it became apparent that millions of mortgages could never be paid and that the underlying security for the loans – millions of houses – no longer had enough value to cover lender losses, assuming that they ever did. But what we are seeing is that the “nontraditional” mortgage products sold before 2008 still haunt us.

Speaking in August, Marina Walsh, the Vice President of Industry Analysis with the Mortgage Bankers Association, said that “legacy loans continued to account for the majority of all troubled mortgages. “Seventy-three percent of the loans that were seriously delinquent, either more than 90 days delinquent or in the foreclosure process were originated before 2008, even as the overall rate of serious delinquencies for those cohorts decreased.”

Old Legacy Mortgages, New Problems

“The widespread rise in foreclosure activity in the third quarter compared to a year ago is the result of two starkly different trends taking place,” said RealtyTrac Vice President Daren Blomquist.

“In states such as New Jersey, Massachusetts, and New York, a flood of deferred distress from the last housing crisis is finally spilling over the legislative and legal dams that have held back some foreclosure activity for years. That deferred distress often represents properties with deferred maintenance that will sell at more deeply discounted prices, creating a drag on overall home values. On the other hand, in states such as Texas, Michigan and Washington, the third quarter increases are a sign that the foreclosure market has settled into a normalized pattern close to or even below pre-crisis levels, and in those states the overall housing market should easily absorb the additional foreclosure activity with little impact on home values.”

Take Maryland.

Maryland is now the fourth most-active foreclosure state according to RealtyTrac and yet the state is hardly a financial basket-case. It benefits from a location adjacent to Washington, DC, and what is likely the world’s largest medical cluster (the National Institutes of Health, the Walter Reed National Military Medical Center, and the Food and Drug Administration plus a huge number of contractors, consultants and private laboratories). Also, Maryland is a leading computer center, it has a huge port (Baltimore), and it’s the richest state on the basis of household income.

Why then does Maryland have so many foreclosures, something usually associated with weak economies and high unemployment? The answer is that several years ago most foreclosures in the state stalled while the courts tried to figure out if the foreclosure affidavits and other paperwork were correctly completed. Once the answer came back lenders opened old legacy mortgage files and the foreclosure surge was on.

Old Foreclosures, Low Home Prices

You can see the problem. If a lot of homes are being foreclosed in 2015 then it’s tough for property values to rise to the point where they would be without huge numbers of distressed properties pushing down prices.

Across the country it’s the same problem. The mortgage practices and products allowed between 2000 and 2008 – the years when regulations were ignored or not enforced – created the problems which are still holding back the housing sector and local real estate markets.

We’ll ultimately get past the no-doc loan applications, the option ARMs and the stated-income mortgages, but unfortunately the cost can be measured in terms of trillions of dollars in lost equity and at least seven million foreclosed homes.

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1 Comment on "Why Legacy Mortgages Still Boost Foreclosure Totals"

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  1. You are absolutely right! Housing values continue to suffer here in Maryland because of the slew of foreclosure sales. Qualified first time home buyers in Maryland are however able to afford homes that they otherwise could not. The scary thing is that subprime mortgages are starting to appear again.

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