Will A Tsunami Of Foreclosures Sweep Over The American Real Estate Market?

MayorBob.

Posted to Etcetera on Sat Dec 23, 2006 at 09:53:45 AM EST (promoted by port1080). RSS.

Much has been written about the real estate bubble threatening to burst in various cities around the country. But, if the Center for Responsible Lending (CRL), a major non-profit policy and research organization has it correctly, the next bubble to pop will be the foreclosure bubble. According to the CRL, when that bubble pops, could cost 2.2 million Americans their homes.

According to the CRL's 58 pg report (pdf doc) the upcoming bubble is attributable to two factors: a deflation in the housing market and a surge in sub-prime loans. The CRL views the explosion in sub-prime lending over the past few years as the leading factor. Sub-primes are loans extended to borrowers with less than excellent or no credit histories. They typically feature a much higher interest rate on the note than a traditional mortgage loan. Sub-prime borrowers are typically those willing to pay a higher monthly payment for the privilege of calling themselves home owners. They are also those who tend to live a little closer to the limit of their bank accounts on a regular basis. When financial difficulties hit these borrowers, they are more liable to get behind or default on their mortgages.

Sub-prime loans have been on the rise, with that rise steepening recently. According to the CRL report, about a quarter of all loans generated over the past ten months have been high interest, sub-prime loans. Michael Calhoun, CRL president said:

"Subprime lenders are selling the most dangerous loans to the most vulnerable borrowers. One in 5 families who get subprime loans today will lose their homes to foreclosure."

The Mortgage Bankers Association (MBA), a lending industry trade group, calls the CRL's figures "a worst case scenario." The MBA estimates that sub-prime loans only account for 12 percent of all outstanding mortgages. They say that only about one percent of the 50 million homeowners with mortgages are facing foreclosure. Rather than finding weakness in the overall market, they point to lower interest rates and an increase in refinance requests as signs of overall strengths in the market. The CRL report projected that 4.4 percent of sub-prime borrowers will lose their homes to foreclosure.

The MBA did allow that sub-prime borrowers are falling behind on their mortgages faster than those with lower rates, but still doesn't believe the foreclosure rate will rise to a 4.4 percent level. The CRL is calling for stiffer regulation of the mortgage industry, with controls on the amount of money sub-prime lenders can offer borrowers and financial assistance to those already caught in the grasp of sub-prime loans they can't possibly manage. According to Calhoun, "it is unconscionable to sell loans without verifying that the borrower has a reasonable chance to meet payments."

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Tags: edited by Port1080, written by MayorBob, housing, mortgages, sub-prime lending, foreclosures (all tags)

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4	Re: Will A Tsunami Of Foreclosures Sweep Over The Ozyman. Tue Dec 26, 2006 at 12:42:19 PM EST 4.00 (funny)

"it is unconscionable to sell loans without verifying that the borrower has a reasonable chance to meet payments."

From the story, only 1 in 5 will fail to meet their payments, so I'd say 80% is a pretty reasonable chance.

1	Going down... shatov. Sat Dec 23, 2006 at 06:51:46 PM EST none

This whole issue needs to be tied in with the US economy as a whole. Consumer spending is now around 70% of GDP, up from under 65% in the '50s and '60s. It is only in the past 8 years that consumer spending has made up that much of the US GDP.

Looking here we can see that consumer spending is responsible for almost all current GDP growth, while "private domestic investment" - housing - is now a drag on the US GDP.

This economic boom has not translated into increases in salary or the large-scale creation of new jobs, except for in housing. There is likely to be a corresponding loss of jobs in housing, as the housing market falls, but where will these newly unemployed find jobs? Even for people who do keep their jobs, their salaries have not been increasing at a rate anywhere near the rate of increase in the size of their mortgages.

Perhaps most people will still meet their mortgage payments, but this is going to be at the cost of a reduction in consumer spending - which is the mainstay of the US economy. But, of course, a reduction in consumer spending is likely to lead to a loss of jobs, which will lead to more people unable to spend money, etc. A recession would lead to even more foreclosures and job losses.

How many sub-prime borrowers are in insecure jobs, that will be at risk in the event of a recession? With so much growth based upon consumer spending, fueled by extracting "equity" from houses, I think that the US economy is going to fall significantly.

According to Calhoun, "it is unconscionable to sell loans without verifying that the borrower has a reasonable chance to meet payments."

Unconscionable, but illegal? Will this downturn see McLawsuits against mortgage sellers? That might be the only way for sub-prime borrowers to save their houses, but it is difficult to imagine that US courts would rule against the mortgage sellers, with so much money at stake.

2 1	Re: Going down... MayorBob. Sun Dec 24, 2006 at 07:55:12 AM EST none

"Will this downturn see McLawsuits against mortgage sellers? That might be the only way for sub-prime borrowers to save their houses, but it is difficult to imagine that US courts would rule against the mortgage sellers, with so much money at stake."

The sub-prime borrowers will likely move their possessions meekly out of their homes and find housing in the rental sector. I doubt that there's anyone who is going to be able to draw a line over the dots between sub-prime lending and a putative collapse of the US economy. Besides, I sort of agree with what some in the lending industry say -- that the whole edifice of sub-prime lending won't collapse that rapidly. The thing that will cause the US economy to implode will be caused by a combination of things: the debt service the US treasury has to make to cover the costs of a war that won't go away; a movement away from US investments by foreign investors; and a decreasing value of the US dollar and increasing tendency to move away from using it as a measure of any real wealth.

Illegitimi non carborundum.

5 2	feedback effect JimmyHavok. Wed Dec 27, 2006 at 02:00:38 AM EST none

The problem is one of potential positive feedback. If a slump in housing prices causes a wave of foreclosures, the sudden dumping of those properties on the market will cause an even greater slump in housing prices, driving even more mortgages underwater. No doubt many lenders will be afraid of just that and tend to go easier on defaulting borrowers (perhaps letting them slide so long as they make the interest payment each month) but kindness goes only so far, and a recession could easily overstrain the supply.

We had a housing price slump here about 10-15 years ago, and I was working with a guy whose house was no longer worth what he owed on it. He was having a bit of trouble keeping up the payments, and the bank was all over him. Seemed they were willing to take the loss from a foreclosure, rather than letting him miss or short an occasional payment.

3 1	Re: Going down... thefadd. Mon Dec 25, 2006 at 06:09:46 PM EST none

This economic boom has not translated into increases in salary or the large-scale creation of new jobs, except for in housing.

Economic "gains" under a "conservative" presidency actually a bubble? Who'd have thunk it? How many days until we're afforded the opportunity to return a Clinton to the WH?

escalators never fail; they just become stairs

6 1	Re: Facts, and damn few of them zyxwvutsr. Wed Dec 27, 2006 at 01:20:27 PM EST none

This economic boom has not translated into...creation of new jobs, except for in housing

Hmmm, let's see: Construction employment was up a little, but there were far more new jobs created in other sectors, such as financial services, education and health services, leisure and hospitality, and professional and business services.

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Will A Tsunami Of Foreclosures Sweep Over The American Real Estate Market?

MayorBob.

Posted to Etcetera on Sat Dec 23, 2006 at 09:53:45 AM EST (promoted by port1080). RSS.

Re: Will A Tsunami Of Foreclosures Sweep Over The

Ozyman.

Tue Dec 26, 2006 at 12:42:19 PM EST

4.00 (funny)

Going down...

shatov.

Sat Dec 23, 2006 at 06:51:46 PM EST

none

1

Re: Going down...

MayorBob.

Sun Dec 24, 2006 at 07:55:12 AM EST

none

2

feedback effect

JimmyHavok.

Wed Dec 27, 2006 at 02:00:38 AM EST

none

1

Re: Going down...

thefadd.

Mon Dec 25, 2006 at 06:09:46 PM EST

none

1

Re: Facts, and damn few of them

zyxwvutsr.

Wed Dec 27, 2006 at 01:20:27 PM EST

none