Foreclosures are beginning to be a problem as housing sales slump, both in new homes and resale homes.
The foreclosure problem will undoubtedly exacerbate as hybrid mortgage loans -- interest only, ARMs, etc. -- begin to change to more conventional terms, as provided in the loan contracts.
Many of those borrowers will find that they are unable to comfortably meet the new payment amounts. After all, the reason most of them chose the hybrid product was because their income wouldn't substantiate the payment requirements of a conventional loan.
It seems to me that hybrid lenders would be wise to adopt a one year moratorium before changing the payment terms. They should notify the borrowers that they have a year to refinance the loan or sell the property. That should provide order to the market, and help keep real estate values from domino depression.
Here are the latest figures as reported by CNN's Money, regarding the top ten foreclosure zip codes:
| Zip | City | State | Total Filings |
| 44105 | Cleveland | OH | 783 |
| 30310 | Atlanta | GA | 709 |
| 80219 | Denver | CO | 705 |
| 48228 | Detroit | MI | 679 |
| 95823 | Sacramento | CA | 634 |
| 48205 | Detroit | MI | 634 |
| 48224 | Detroit | MI | 583 |
| 89031 | N. Las Vegas | NV | 575 |
| 80239 | Denver | CO | 553 |
| 48219 | Detroit | MI | 549 |
I am from the Detroit area and it is not good news to see we have four of the top ten. I do have two investors from Los Angeles who are interested in some of these zip codes - so a bit of good news in this challenging market. Two of the Realtors in our office do nothing but list foreclosures and they are unbelievable busy - with sales!
Bill
Our top 2 agents also do nothing but bank owned properties, also in the Detroit area.
It is amazing how some of these people end up in foreclosure. Blame can go in several directions, sometimes the lender, sometimes the borrower(s). In Minnesota, title companies, realtors and lenders are busy with foreclosures - which is very sad.
To me it is a lenders responsibility to set a client up for success not failure - in other words if they shouldn't buy the home because it is setting them up for failure, then educate them and work with them. Set up a plan to improve their credit, save money for a down payment, reduce their debt, get a more stable job, whatever it is that they need to do to get a better rate. They may have to wait a 12 months or more, but it may be what needs to happen.
IO Arms can be a phenomenal investment tool for the right borrower - it's not necessarily to get the lower payment, but to keep your money invested making money instead of getting 0% interest on your principal.
Whereas the Option Arms are another HUGE discussion...and it should not be a lender not telling the client why the rate is so low and the borrower not knowing the right question to ask and then finding out a year or two later that they owe more than they paid.
Thanks for your comments and the updates. Here's my take on all of this:
It is common logic to believe that a lender isn't going to lend you his money if he thinks you will have trouble paying him back. And after all, that's how we were taught things were when I was growing up.
Today, people are taught to trick their credit scores, add co-signers, make up gift letters, and tinker with loan terms so that they can temporarily qualify for the "house of their dreams." Those people have to think that the lender knows best. "If he's willing to lend me the money, then he must feel sure I can pay it back. Afterall, he's the banker...what do I know?"
Within moments everyone's in trouble, and all blame immediately shifts to the borrower, and the lender now wants to beat the tar out of him and ruin his life forever.
All of these "no personal equity loans" -- or at least most of them -- should never be made at all. Instead, greed rules.
Joan, when I got our of graduate school the first time, it was February, and there were no teaching jobs available, so as a stop gap I went to work in a bank making real estate loans.
My personality is such that I hate committees. Instead, I prefer the "tell me what you want me to do, give me the sole authority to do it, if I mess up, fire me" approach." So the bank let me research credit, study projects and then decided whether or not to make the loan.
I made more loans than my cohorts, my delinquency ratio was much lower, and I collected a every dime of those that fell into trouble.
Everyone knows those loans that have to be tricked to make them work are bad loans. But when the committee decides, the members don't have to take responsibility and won't. Meanwhile, some poor jerk and his family who were in love with their home get it yanked out from under them while getting sustained humiliation.
Me, too, Gita.
What % of foreclosures will be in South East Florida?? How to find out? Foreclosures are beginning to be a problem everywhere. Is a short term sale better than foreclosures?
Yes a short term sale is better than a foreclosure.
Bill---I think you have the right idea but I think the real solution is much more than just a one year moratorium. One year is only delaying the inevitable. I believe this mess is going to last much longer than that. The majority of ARMs haven't even recasted yet.
The only solution, in my opinion, is note modification. You re-work all of the distressed loans to 40 year terms, letting them keep their current rate for at least three to five years and then it can start SLOWLY adjusting yearly.
Note modification is the hot topic at all of these banks right now. However, they are holding back on rolling this out currently because many of the packaged loans they sold in bulk to large institutional investors don't allow for note modifications.
Opponents of note modification point out that the average borrower who had his note modified in the past, still was late on his mortgage. However, we are getting to a point where some variation of this may be the only viable option.
Aaron, you are much more adroit in this part of real restate than I am, so I bow to your ideas as better than mine. And I surely apperciate your taking the time to write your comments for us all to read and think about.
If we know that the average person sells his home and moves every seven years, why would lenders rather put their borrowers and their (the lender's) investments into jeopardy -- a jeopardy that on the front end everyone knows they can't manage or recover from -- when by keeping the status quo there will be relatively few losses and the lender and his customers will have resolution within a couple of years?
The main rule of argumentation and debate is this: "Is there a need for a change?" If you can't convince the jury or judges that you have a solution that is better than the status quo, the status quo wins by default. But if your solution is better than the status quo, the status quo proponents crash and burn.
Why is it difficult for lenders/mortgage loan investors to see that the status quo is going to result in huge red ink loses, and that only their hard headedness will be able to be blamed for it? Is it that they are so arrogant that they are saying, "It's our money and you're going to do it our way, by God, or you can just take the punishment delt by foreclosure and deficiency judgments"?
I hope they come around to endorsing your solution or some reasonable hybrid of it. It would definitely, in my judgment, do a great deal to stabilize the economy.
Bill---I agree 100%! What you have at the top of this are Wall Street guys that simply play numbers. They don't think or care about the fall-out or about the long-term damage created. They aren't and never were in the real estate business. They are simply in the money business.
In some cases, these guys would rather write off $100M's in bad loans, take the tax write-off, liquidate the assets, and move on to new investment strategies, than do the work necessary to save half of it.
They got is in this mess by purchasing more and more creative loans but they won't be there for the clean-up.
At the end of the day we will be back to the lending options of Fannie, Freddie, FHA, VA, and a handful of guys, like Countrywide and Wells, with very strict lending guidelines. That day is likely coming soon.