Yes, The Default and Foreclosure Risk is Here and it is Real!

We now see over 100,000 home-foreclosures per month (for the last 5 months) (RealtyTrack 1/07). On January 24, 2007 the Central Valley Business Times (CVBT) reported on the latest PMI Group study entitled Economic & Real Estate Trends (Milner, Henry), saying: “There’s a greater risk of price declines in 34 of the nation’s 50 largest metro areas, PMI says. That translates into a 34.2 percent chance that home prices will decline in two years, according to PMI’s formulas. Nineteen MSAs face a greater than 50 percent chance that home prices will decline, up from 18 last quarter, it adds. While year-over-year appreciation remained in the double digits in 14 of the 50 largest MSAs, the rate of appreciation slowed in 43. The risk of price declines continues to be concentrated in California and along the eastern seaboard. Of the 19 MSAs facing a greater than 50 percent chance of a price decline, eight are located in California, eight are in the Northeast, and two are in Florida.” In high-price areas such as California, “foreclosures were up nearly seven-fold in the fourth quarter of 2006 and the number of notices of default, the first step in the foreclosure process, were up 145 percent compared to the figures from a year earlier, according to real estate information company DataQuick Information Systems of La Jolla.” Recent reports of increases in loan applications don’t necessarily show a healthy homeownership market, but reveal possible panic to replace adjusting Option A.R.M.S. as values and appraisals fall. Millions of homeowners are about to lose their homes from default or foreclosure over the next few years in waves, as adjustable loans and HELOCs reset. One of five subprime mortgages over the last two years will end in foreclosure, nearly double the projected rate from 2002. When distressed prepayments are added in, total “failure rate” approaches 25 percent. Of the subprime loans, over 50% went to African-Americans, and 40% to Hispanics. (Center Responsible Lending 12/2006) The foreclosure sub-culture is now gearing up (for the kill) and growing rapidly. Foreclosures are here and about to break the dam with dramatic numbers each and every year over the next few years corresponding to the reset dates of adjusting mortgages. Homeowners are already becoming locked-in with no way out. The negative consequences to the economy will be devastating when compounded by the strain of changing demographics.