That’s the thinking of a considerable segment of the population, a segment represented in some of the email I receive as well as in the ethics classes I teach for real estate brokers.

Borrowers, according to such logic, should not be bailed out. They signed up for a loan and if it had woeful terms it was the borrower’s job to know better. Let the market take its course; if people fail they’ll know better the next time. Besides, individual responsibility counts.

It’s not up the government to rescue people who made bad financial decisions goes such thinking, especially real estate investors. As President Bush said in August 2007, “it’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

There’s much regarding the borrower-is-responsible view which is attractive, including simplicity. That said, borrower responsibility should be seen as a nuanced concept, one which requires a look at both principle and circumstances. Here’s why:

Theory Versus Reality

Personal responsibility is a great theory, but when used on an absolutist basis it denies the reality of modern life, the fact that we are each dependent on one another because no one knows everything.

For instance, when you get dental work do you check to see that the dentist properly sterilized his instruments? Why not? Dirty dental tools can lead to massive infections that can disfigure your face, cause you to go blind and lead to brain injuries and death.

The truth is you don’t check the dentist’s instruments for the same reason you don’t ask a chef when he last washed his hands or the brake repair guy if he tightened all the bolts. Instead, you expect that even the most mundane activities have standards, protections and social norms which make your dealings safe and predictable.

Unfortunately, when it comes to mortgage lending virtually no one understands the paperwork they sign at closing and thus the full content of the loans they take out.

Don’t believe it? Let’s get some testimony from people who should be supremely adept at mortgage matters, real estate attorneys with nationally-recognized expertise and credentials.

Unread Paperwork

First up we have Mel Martinez, previously a secretary of the Department of Housing and Urban Development and a former United States senator from Florida. As Mr. Martinez told The Washington Post, “you know if I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work’ to be done fixing the system.” (See: HUD Chief Seeks Simpler Sale Closings, June 2, 2001)

Next we have former HUD Secretary Alphonso Jackson. According to The Washington Times, “Jackson says he knows just how borrowers must feel when they’re caught off-guard by sudden surges in their monthly payments because they didn’t read the fine print in their contracts.

“‘I’m an attorney and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan.’” (See: Jackson: Mortgage fine print not read, March 20, 2008)

Bargaining Over Terms

A basic concept in the contracting process is that both parties must be able “to negotiate as equals to have a valid contract,” according to Successful real Estate Negotiation. “In situations where one party feels compelled to act because he or she believes they have no choice, or do not have a valid opportunity to understand the agreement, or finds the complex and technical language used in the contract is over his or her head, then such contracts may, in certain instances, be declared invalid by the courts because these deals lack a true ‘bargaining over terms.’ A contract in which the language cannot be understood equally by both parties is a so-called ‘contract of adhesion.’”

Missing Protection

The mortgage system has broken down because in many places the standards and protections that any normal, rational person would expect are missing. The result is that blanket expectations of personal responsibility are not possible on a playing field which is neither fair nor level.

Regulators, for example, should be expected to protect the public interest yet did nothing to stop the widespread use of stated-income loans nor did they object to the unfettered use of option ARMs or interest-only mortgages, the toxic loans behind many of today’s foreclosures.

Not only did federal regulators fail to protect the public, they made sure that state regulators could do little if anything to defend borrower interests. As the federal Office of Thrift Supervision has said, state laws which “prohibit the financing of single premium credit life insurance or that restrict points, fees, and prepayment penalties or other forms of compensation are preempted” by federal regulations.

A Contract is a Contract — But Not Always

A mortgage is nothing more than a contract between a borrower and a lender. A lender provides cash in exchange for the borrower’s promise to repay the debt under certain terms and conditions.

But while the concept of a “contract” can be generally explained in just a few words, the actual mechanics of contract law fill large libraries. It’s not enough to just sign on the dotted line, a host of other factors potentially come into play.

“The case for personal responsibility is surely attractive,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s largest source of foreclosure data and listings. “But our legal system plainly recognizes that personal responsibility does not exist in a vacuum. To look only at personal responsibility when considering mortgage issues is to miss the larger picture.”

As an example, in California the Fourth Appellate District Court of Appeal heard a dispute between a builder and a home buyer. The issue in Baker v. Osborne Development: Was the buyer obligated to use binding arbitration in the event of a dispute with the builder?

The written agreement between the parties was clear: Buyer Baker had agreed to use an arbitration service named by Builder Osborne. But the appeals court ruled in January that the requirement could not be enforced. Why? Because the terms of the agreement were unconscionable.

It’s not enough to bury “overly harsh” and “one-sided” clauses in a complex legal document and then expect them to be enforced. Fairness and balance also count, said the court, which ruled for Baker the borrower.

There are other elements required to create a valid agreement besides a signature. First, said the court, there is the matter of oppression. “Oppression arises when the parties have unequal bargaining power, leading to no real negotiation and lack of meaningful choice.”

Element of Surprise

Also, said the judges, the agreement failed because it contained an element of “surprise.”

“Surprise may arise when challenged terms are hidden in a prolix printed form drafted by a party in a superior bargaining position.” (The term “prolix” means lengthy and complex.)

Hmm — a prolix printed form. That sure sounds like a toxic mortgage agreement

The Role of Lenders

But what about lenders? Can’t borrowers rely on them for advice? Don’t lenders universally try to get the best rates and terms for borrowers?

“Some have proposed,” Harry Dinham, a former president of the National Association of Mortgage Brokers told Congress, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.”

Another leader of the lender community, John Robbins, former chairman of the Mortgage Bankers Association, has said that “a lender underwrites, approves and funds the loan. The lender does not hold himself out as an agent of the borrower. While a lender must serve its customers fairly, and the industry has done much to assure high professional standards, a lender owes a duty to its shareholders and investors. A borrower knows a lender offers its own products and does not offer to shop for borrowers.”

While some lenders — such as those who belong to the UpFront Mortgage Brokers Association — feel they have a fiduciary obligation toward borrowers, much of the lending industry does not. How can borrowers tell the difference? It’s virtually impossible because no lender advertises that “we’re not here to get you the best possible rates.”

While there’s an important standard of personal responsibility which ought to be recognized, it’s obviously a standard which is not absolute. This should not be seen as a surprise: As Supreme Court Justice Antonin Scalia — a principled conservative by any measure — has explained, “you can make an exception without the sky falling.”

(Update: If passed, the Wall Street reform bill will finally assume that lenders have a baseline obligation to treat borrowers fairly. In fact, the bill actually allows borrowers to collect big damages for lender abuses. Stay tuned to see if it passes and if the consumer protections remain in place.)

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Published originally by RealtyTrac.com in 2008 and posted with permission.

Responsibility: But Didn’t The Borrower Sign The Mortgage? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Written by Clifford V. Rossi, a business professor at the University of Maryland, Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future “contends that expansion into riskier products by mortgage firms that subsequently suffered large credit losses was a strategy intended to grow the franchise and along with it the attractiveness of the firm to investors.”

The goal was to increase the “attractiveness of the firm to investors.” In other words, company stock. “If executives could not earn a higher return on invested capital,” explains Rossi, “they would be replaced through a takeover by executives who could. This message was consistently and convincingly hammered home by Wall Street analysts to every increasingly anxious CEO and CFO.”

The report says that new loan formats were developed in an environment where the true extent of lender risk was not understood.

Multiple Causes

Rossi says “no single factor was responsible for the significant expansion of credit and mortgage products during the period leading up to the mortgage crisis. However, there are indications that greater risk-taking could be attributed to the following factors:

• “An over-reliance on performance metrics not adjusted for risk which would lead management toward riskier products
• “Data and analytical limitations and blind spots that led risk managers to grossly underestimate credit losses
• “Cognitive biases among senior business managers that over time led them to take greater risks, and in the process reduced the effectiveness of risk management practices
• “Incentive problems leading to regulatory actions that wound up not being in the best interest of the taxpayer.”

Bad Timing

Rossi says non-traditional mortgage products were introduced during a period when home appreciation was strong and interest rates were near historic lows.

“This favorable economic environment,” says Rossi, “contributed to a period in which mortgage default rates were very low by historical standards. As a result, the economic environment tended to bias loss estimates downward in a real
sense. This contributed to further mortgage expansion and vast understatement of potential losses due to risk layering and the expansion of nontraditional mortgage products such as option ARMs and piggyback HELOCs. The development of new products and the expansion of risk parameters on existing products came at perhaps the worst time. With virtually no historical experience with these new risk combinations and that which existed largely coming from a benign economic environment, risk models would have little hope to accurately reflect expected loss, let alone loss levels during an extreme event such as the financial crisis.”

Translation: Industry leaders should have listened to stock brokers who always remind us that past performance does not guarantee future results.

No Doc Loans

Another interesting point made by Rossi concerns the increased use of no-doc and low-doc mortgage applications.

“As underwriting standards on income documentation and LTV loosened, allowing for both limited or no income verification and low equity stakes in the property, traditional borrower sentiment toward home ownership changed. Renters were increasingly able to become homeowners with little downpayment and with creative cash flow structures that provided short-term payment capacity. As long as home prices continued to rise, a borrower in such a situation could refinance out of one loan and into another, or sell the property without loss. But once home prices peaked, particularly for those purchasing their home at or near the top of the cycle and possessing limited equity in the property, borrowers became stranded in the home with few alternatives. In such cases, borrowers ruthlessly exercised their default option as historically important ties to the home were outweighed by excessive payment burdens coupled with negative equity in the home. At the same time, widespread lapses in controls of counterparties as evidenced by a spike in mortgage fraud aggravated a growing credit problem.”

This is an area where I disagree with Rossi. While there was surely a lot of mortgage fraud, there was also a lot of predatory lending where — for example — borrowers who qualified for better financing were sold high-cost subprime mortgages. Unfortunately, the term “predatory” does not appear in the report. Also among the missing is the word “fiduciary,” as in the lack of an obligation under federal rules by lenders to get the best possible rates and terms for borrowers.

That said, the Rossi report is unusually well-done and should be read by anyone who wants a better understanding of the motivations which led to the mortgage meltdown. It’s a step forward, helpful and insightful.

Stock Prices At Heart Of Mortgage Crash is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Glum news on the foreclosure front continues. The latest MBA statistics offer the following highlights.

• The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 2.83 percent from last year ago.
• The states of California, Florida, Arizona and Nevada represented 44 percent of all of new foreclosures during the second quarter of this year.
• Compared with the second quarter of 2008, the percentage of loans in the process of foreclosure increased 158 basis points for prime loans and 324 basis points for subprime loans. The rate increased 74 basis points for FHA loans and 74 basis points for VA loans.
• The seasonally adjusted delinquency rate increased to 6.41 percent for prime loans while a whopping 25.35 of all subprime loans were late. Among FHA borrowers, 14.42 percent were late while VA borrowers saw their delinquency rate dip from 8.21 percent to 8.06 percent during the past year.
• The percentage of loans in the foreclosure process reached 3.00 percent for prime loans and an amazing 15.05 percent for subprime financing. The rate for both FHA loans (2.98 percent) and VA loans (2.07 percent) was lower than the rate for prime mortgages.

These numbers, of course, demonstrate that foreclosure problems not only remained, they actually grew during the second quarter. With a rising unemployment rate, the failure of many loan modifications and the end to a number of mortgage moratoriums it’s difficult to see how the third quarter will be any better.

The maps below, courtesy of the Mortgage Bankers Association, show how foreclosure and delinquency figures look when mapped.

Mortgages: Foreclosure Rates Continue To Soar is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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On August 15th and within five minutes of each other, email arrived from the Mortgage Bankers Association and the National Association of Realtors arguing both sides of the issue.

Saying that “abusive lending erodes confidence in the nation’s housing system,” NAR told the Federal Reserve that “prepayment penalties often trap borrowers in loans they cannot afford by making them too expensive to refinance. While some lenders may, in fact, offer lower rates in exchange for a borrower agreeing to a prepayment penalty, in the experience of many Realtors, that option is not typical. A 2005 study by the Center for Responsible Lending concluded that borrowers with subprime loans and prepayment penalties do not receive lower interest rates, and may actually pay higher rates.”

NAR then went on and said “the use of prepayment penalties with terms that extend beyond the initial fixed interest rate period that is a feature of many adjustable rate mortgages is particularly egregious. Some originators encourage consumers to accept these loans by reassuring them that they can always avoid a jump in payments by refinancing before the reset period. But then, when they do refinance, assuming they can in the current credit environment, the lender charges a prepayment penalty. This is one of the most unfair practices engaged in by irresponsible lenders.”

The Mortgage Bankers Association offered an entirely different view. They argued that “prohibiting or significantly restricting prepayment penalties can be expected to increase rates to borrowers and would eliminate certain financing options for consumers. MBA supports the limitation of prepayment penalties to three years for all mortgage loans and expects that the market will conform to the recent subprime statement requiring prepayment penalties not extend beyond the reset period of hybrid ARMs and allow borrowers a period of up to 60 days prior to the initial ARM reset to avoid a prepayment penalty.”

If the question were one of “either/or” you would certainly have borrowers backing the NAR position in overwhelming numbers. But while the NAR position is plainly more popular, it still requires some tinkering because there is one important instance where prepayment penalties are justified.

Imagine that you get a $200,000 loan. You want to hold down closing costs so the lender offers a trade: We’ll pay most closing costs if you accept a somewhat higher rate.

By “most closing costs” the lender means that it will pay all settlement expenses except prepaid items such as tax and insurance escrows, mortgage insurance, HOA/Condo fees and mortgage insurance premiums. The lender won’t be responsible for owner’s title insurance coverage or any charges to pay off an existing loan.

In this situation — commonly and incorrectly called a “no-cost” loan closing — there are surely expenses. For the borrower the costs of closing are paid over time in the form of a higher rate. For the lender, the costs are paid up front, perhaps $5,000 or more depending on the jurisdiction where the property is located.

“When the lender pays all closing expenses without increasing the loan balance then a prepayment penalty is fair because the lender should have an opportunity to recoup its actual cash costs,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s leading foreclosure marketplace. “We need to work out a system which preserves the so-called “no cost’ closing option while giving lenders a fair opportunity to recover their up-front expenses.”

How Long?

As to a prepayment penalty period, three years — with a qualification — seems like a fair time for the lender to recover it’s costs. The qualification is this: The prepayment penalty in month #1 should not be the same as month #36.

As an example: Imagine that you have a subprime loan with a $200,000 balance and a six-month prepayment penalty if the loan is paid off at anytime during the first three years. The loan has a 9 percent interest rate and because of improving credit you have a chance to refinance down to 7.5 percent after two years. The prepayment penalty is $9,000, money due at closing when the loan is refinanced. ($200,000 x 9% = $18,000. $18,000/2 = $9,000).

For most borrowers, especially those trying to end subprime mortgages and their steep rates, a $9,000 penalty is an impossible barrier, something which cannot be overcome. The result is no refinancing during the penalty period and vastly-higher costs month after month.

Prepayment penalties have a huge impact on effective interest rates. For instance, if the loan is refinanced after two full years, the borrower paid interest worth $17,944.55 in the first year, $17,816.37 in the second and a $9,000 penalty. That’s a total cost of $44,760.92 over two years — an effective rate of roughly 11.2%.

Regardless of what the big print says, our model loan never has a 9-percent rate during its first three years. Why? Because if a borrower wants to refinance to a lower rate, sell the property or pay off the loan during the prepayment period, the actual cost of the loan is substantially greater than the quoted rate. Instead of an up-front teaser rate, what we really have is an inverse-rate loan, financing with a higher start cost and then a lower interest level at the end.

What About Discounts?

It’s sometimes argued that borrowers should accept a prepayment penalty in exchange for a lower rate. Superficially, such a trade seems reasonable, but the borrower is dependent on the mortgage lender for rate information. Since rates are in constant flux and because different rates apply to different loan products and borrowers with different credit profiles, there is no set interest level to discount. Because the borrower does not know the benchmark interest rate for a given combination of loan factors, there’s no evidence — as NAR reports — that there has been a particular discount, or in some cases any discount.

The idea that lenders are offering a discount would have greater credibility if loan officers had a fiduciary duty and borrowers were their clients. As agents of a borrower, lenders would be required to obtain the best possible rates and terms for borrowers. Instead, lenders argue fiercely that it’s not their job to advance borrower interests.

“Some have proposed that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer,” Harry Dinham, president of the National Association of Mortgage Brokers, told Congress. “NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.

“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,” Dinham said.

But how can a borrower make an informed decision when lenders have all the information and borrowers are dependent on lenders? The parallel situation in real estate works like this: A property owner is promised 100 percent of a given sale price. If the target is met the broker’s commission is equal to everything above the target value. Such an arrangement presumes that the borrower knows the value of his or her property, a presumption so absurd that so-called “net listings” for residential properties are illegal in most if not all states.

What Happened To Good Credit?

There’s substantial evidence that the benefits of good credit are not being passed through to mortgage borrowers.

James Lockhart, the Director of the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator that oversees Fannie Mae and Freddie Mac, says that “subprime originations market share almost tripled from 7.2% in 2002 of total originations to 21.4% in 2006.” Meanwhile, FHA originations fell from 1,246,561 loans in 2002 to 502,000 mortgages in 2006.

The Census Bureau has just reported that median household income amounted to $48,200 in 2006 and that the poverty rate is down from 12.6 percent in 2005 to 12.3 percent in 2006.

How can it be that the number of people with “weak” credit tripled in the midst of good economic times and one of the largest real estate growth spurts in U.S. history? Could something else be at work?

One reason for subprime growth is simple: Borrowers who qualify for lower-cost FHA financing are being steered to higher-cost subprime loans. Why? Lenders get far larger profits. (For an interesting look at lender economics, see: Inside the Countrywide Lending Spree, The New York Times, August 26, 2007)

The same scenario is also true for stated-income loan applications. By using stated-income apps lenders charge higher fees — including higher fees for employed borrowers who can readily document their income but do not know that such an option exists. You can’t, of course, use a stated-income loan application for an FHA mortgage and therefore as a broker you can’t get the higher rate or additional fee available with a subprime loan.

What About Investors?

The argument is made that if prepayment penalties are restricted or prohibited then investors will no longer purchase mortgages.

Some investors will surely take their money elsewhere if the prepayment system is changed — but where? After the stock market lost some $5 trillion in its most recent crash, some investors plainly left the market — but the market continued, most people stayed invested and the Dow today is substantially above the pre-crash high of 11,722.98 reached during January 2000.

The U.S. mortgage marketplace now involves trillions of dollars. If investors leave, where will they put their money? It’s difficult to see trillions of dollars deposited in local passbook savings accounts or uncertain foreign assets. The overwhelming majority of U.S. mortgages — including subprime loans — are being paid off, reason enough to keep funds in such investments.

The Case For Declining Prepayment Penalties

Instead of a flat, one-size-fits-all penalty at any point during the penalty period, a lender should be entitled to a prepayment penalty equal to 100 percent of its actual cash closing costs only in month #1. Each month thereafter the size of the penalty should decline by 2.778% until it reaches zero. (2.778% x 36 = 100.008%)

Why? Because each month the lender has a chance to get interest from the loan — and the trade with a “no cost” mortgage was more interest for reduced costs up front. Having a $5,000 penalty in month #1 may make sense, but not in month #36.

As to $9,000, if that sum exceeds the cash payment made by a lender at closing then it’s simply excess, unearned and unjustified profit for the lender; a cost unrelated to any borrower benefit and an expense made possible only because the lender has more leverage than the consumer.

“There’s also a very practical, market-driven, reason for both borrowers and policy makers to favor ‘no cost’ mortgages,” Saccacio explains. “Lenders do a lot of loans. They have economic power in the marketplace. They can force down expenses for settlement services in a way that individual borrowers cannot. A lender who does 500 loans with a settlement provider is going to pay a lot less per closing then an individual borrower. If settlement costs are reduced that means lenders get back their cash investment faster and borrowers face smaller prepayment penalties.”

As to prepayment fees for loans where the lender is not paying up-front costs, as the old expression goes, “forgetaboutit.”

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Published originally by RealtyTrac.com during August 2007 and posted with permission.

How To End Lethal Prepayment Penalties is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Speaking at the National Press Club, John Robbins, Chairman of the Mortgage Bankers Association, told reporters that the mortgage lending system has generally worked well and that we should not “smash this subtle, intricate and ingenious system as we fix problems in the subprime market.”

Robbins said a large proportion of all homes — 35 percent — are mortgage-free. He also said that “among homeowners, 5.1% of them are subprime borrowers with adjustable rate mortgages.”

“We are seeing a foreclosure rate of 10.8% annualized among subprime ARMS,” Robbins explained. “So what percentage of homeowners are we talking about? Ten percent of five point 1 percent of all homeowners.

“And of that half of one percent of the whole, fully half of THOSE will find some solution that avoids a foreclosure sale.

“In other words, one quarter of one percent will ultimately face foreclosure.

“As we can clearly see, this is not a macro-economic event. No seismic financial occurrence is about to overwhelm the U.S. economy.”

Robbins pointed out that the subprime foreclosure rate must be seen in context.

“Out of 75 million homeowners and 50 million mortgage holders, it’s not an eyebrow raising number, when looked at over that period of years,” said Robbins. “It’s within what we as a society deem as an acceptable risk for the rewards and opportunities of homeownership.”

Let’s agree that the numbers, percentages and proportions used by Robbins are all factually correct. Does that mean foreclosure worries are overblown?

If .25 percent of 50 million loans will ultimately result in foreclosure, that means we’re talking about 125,000 properties.

In the context of the national housing stock, that’s not a big number. But are we making the right comparison?

The fact that there are 75 million homes, including 50 million with mortgages, is not central to current market values because most homes are not available for purchase at any given time. The latest figures from the National Association of Realtors suggest that for the entire year 6 million existing homes will be sold — a figure which includes single-family homes, townhouses, condominiums and co-ops.

Let’s see, if we had 125,000 subprime ARM foreclosures this year that would be 2 percent of the entire resale marketplace.

The catch, of course, is that foreclosures are not limited to subprime ARM loan products. People with other forms of subprime loans are also foreclosed. There are foreclosures with “Alt-A” loans such as the option ARMs and interest-only mortgages used by individuals with better credit. And, of course, people with great credit can also have hard times, the reason there are defaults even with prime mortgages. As Mr. Robbins points out, “personal life events — sickness, job loss — and local economic conditions are still the main drivers of delinquencies, regardless of loan types.”

At the end of 2006, as an example, MBA reported that the percentage of loans in the foreclosure process was 1.19 percent of all outstanding mortgages, an increase of 14 basis points from the third quarter of 2006. If there are 50 million loans, that means 595,000 owners are facing foreclosure in a marketplace where 6 million homes are being sold. That’s about one out of every ten homes which will be sold this year.

Not all owners facing foreclosure will actually lose their homes on the courthouse steps. MBA says that “three out of every four loans that enter the foreclosure process do not wind up as a foreclosure sale, either through the homeowner curing the delinquency, a workout between the lender and borrower, a refinance or a voluntary sale of the home.”

While it’s certainly good news that most foreclosure actions do not reach their final stage, that does not mean the foreclosure process is benign or without consequences.

Foreclosures and rising mortgage costs cause large numbers of homes to enter the marketplace on a distressed basis. Such properties include homes being offered at auction as well as an unknown number of homes marketed by owners hoping to avoid the foreclosure process and preserve their equity and credit. In either case, additional supply is added to local inventories, meaning that all local home values can be impacted.

“Even if you aren’t in trouble with your loan,” writes Steve Brown of the Dallas Morning News, “there’s a threat to your home when houses in the neighborhood are foreclosed. Don’t be surprised if property values fall.”

“We have an economy with strong levels of employment, low interest rates and yet home prices in many areas are falling,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s largest foreclosure resource. “With general economic conditions so good one would expect more housing demand and generally higher prices. Instead in many regions we’re seeing less demand for existing homes and a decline in new home construction because more and more owners are facing foreclosure or have actually been foreclosed. The result is excess inventory that’s forcing down prices in many communities.”

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Published originally by RealtyTrac.com during May 2007 and posted with permission.

Subprime Crisis: Serious or Not? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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