Foreclosures — No Worries, No Vision
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The lending community will plainly tell you that foreclosures are on the rise — in part because of rising interest levels — but don’t worry. According to the party line, there’s no need for alarm because the problem is contained to subprime loans and just a few states.
For example, John Robbins, Chairman of the Mortgage Bankers Association, told reporters at the National Press Club on May 22, 2007 that 35 percent of all homes are mortgage-free. He added 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 concluded that the subprime foreclosure rate had to 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.”
The official line is that if the number of foreclosures goes up that’s not really worrisome because even a bigger number of distressed properties would still represent just a small fraction of all homes. Such logic avoids the reality of the marketplace.
Buyers don’t care how homes are financed. It makes no difference to them whether an owner finances with a fixed-rate loan, an adjustable product or if the property is mortgage free. What counts is price and terms, and owners facing foreclosure are not likely to hold out for either premium prices or stiff terms.
Consider what happens in a new subdivision with 1,000 condo units where the builder begins offering a few at a $50,000 discount to clear out inventory. Can anyone in the subdivision sell units for more? Have not the value of all units fallen — including those owned free and clear of any mortgage debt? Do not low-ball prices show up when comparables are checked?
Most owners in the subdivision will continue to meet their monthly mortgage payments and not sell, thus the fact that large numbers of homes have been devalued will not show up in foreclosure statistics. While this may please lenders and regulators, owners — especially those who had hoped to sell or refinance — may not be too thrilled.
To believe that an increasing number of foreclosures will not have a marketplace impact is neither logical nor believable. Just ask the people in the subdivisions and condo projects where developers have recently cut prices on just a few units. Or folks who live down the street from a home which has been foreclosed.
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Published originally in part by Realty Times on May 2, 2006 and posted with permission.
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