Friday, May 05, 2006

Foreclosures A Problem For Solvent Owners

Realty Times has a look at foreclosures. "The lending community will plainly tell you that foreclosures are on the rise, in part because of rising interest levels, but don't worry. The 30 percent of all owners with adjustable-rate and interest-only loans may want to watch interest levels with care."

"In many cases we're not talking about established ARM programs. Too often we're discussing what I call 'toxic' financing, meaning 'nontraditional' loans such as option ARMS. We usually see that about 1 percent of all loans are in the 'process' of foreclosure."

"However, the coming number of loan foreclosures may be far higher, and they may be far higher precisely because toxic loans are now used so widely. USA Today reports that as many as 1 million of the 7.7 adjustable loan products issued in the past two years may be foreclosed, that's a foreclosure rate 13 times higher than normal."

"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."

"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."

3 Comments:

At 7:09 AM, Blogger Chip said...

"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?"

This reasoning is why I think the re-setting of so many ARMs in the next couple of years, relatively to any time in the history of ARM loans, will reverberate into many or most small communities that were not "bubble" areas per se.

 
At 7:09 AM, Blogger Chip said...

"relative," vs. "relatively"

 
At 8:55 AM, Blogger Loren said...

Once again, price matters. Whether the foreclosures are a "problem" for solvent owners depends in large part on how much the solvent owners paid for the property, and whether they could really afford it in the first place.

It could well be that the foreclosures are an opportunity to get your property taxes revised downwards. It could also be that they can buy the unit next door and rent it out at a ........... Profit!!! Maybe they could even buy the unit next door and expand into the new space or make a mother-in-law space out of it.

It's amazing how debt distorts the viewpoint of the debtor.

 

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