Mass Foreclosures Threaten the U.S.

Jul 12, 2007 -- Home foreclosure activity continues to soar nationwide over the past year, particularly in the states of Nevada, California, Arizona, and Florida. We've compiled a detailed analysis of the foreclosure crisis, including up-to-date graphs depicting recently reported foreclosure activity for these states. (ANALYSIS BELOW)

Foreclosure Data*

U.S. foreclosure activity between 2005 and 2007

As you can see from the chart above, there has been a significant increase in U.S. foreclosure activity between 2005 and 2007.

Nevada has one of the highest foreclosure rates in the nation

Nevada has one of the nation's highest foreclosure rates. The chart above demonstrates how much worse the problem is in 2007 compared to the previous year.

California has seen a huge surge in foreclosure activity

California almost always takes the title of most total foreclosures. The state has recently seen a huge surge in foreclosure activity. Total numbers in May of 2007 were more than four times higher than numbers seen in May of the previous year.

Florida has a very high foreclosure rate

Like Nevada, Florida also has a very high foreclosure rate. Total foreclosures have increased significantly in 2007 compared to 2006.

Arizone 2007 foreclosure numbers are much higher than those seen in 2006

Foreclosure activity is up in all of the 'bubble' states, and Arizona is no exception. As the chart indicates, 2007 foreclosure numbers are much higher than those seen in 2006.

*It should be noted that the data used to create the above charts was obtained from RealtyTrac, an online foreclosure marketplace. The federal government does not track foreclosure data, and neither do most state and local governments. RealtyTrac is a private company, the most widely cited foreclosure authority, and a source of data for the FBI, the Federal Reserve, and the Joint Economic Committee.

RealtyTrac draws numbers from county recorder's offices, and tracks all homes that are in some stage of the foreclosure process. Some economists, like Mark Zandi of Moody's Economy.com claim this does not create an accurate picture of foreclosure activity.

The Mortgage Bankers Association (MBA) has accused RealtyTrac of overstating numbers for personal gain. RealtyTrac counters the charge, saying that their numbers are correct and that the MBA has an agenda that hinges on a conservative interpretation of foreclosure activity.

If and when more reliable data presents itself, this page will be updated to reflect that data.

How Easy Was It To Get Credit During the Housing Boom?

Homeownership has increased by 5 percent during the last 5 boom years and is now at a record high of 70 percent.

Lenders made it almost impossible for a potential homebuyer to get turned down for a mortgage. Suddenly, borrowers with questionable credit, who would have never been able to get a loan ten years ago, were getting mortgages without breaking a sweat.

The use of subprime mortgages increased by leaps and bounds, as did the number of people using zero down loans. According to Merrill Lynch, 43 percent of the people who bought a home in 2005 (during the end of the boom) put no money down. In 2003, it was only 28 percent. In the 90s, it pretty much didn't happen.

Of course, as home prices increased, it became more difficult for lenders to qualify borrowers for loans. This is when the use of interest only loans, ARMs, and no docuмentation loans (liar's loans) became rampant.

Many borrowers were approved based on teaser rates and interest only loan payments. Lenders gave out these loans knowing that once the interest rate adjusted and the payments reset, borrowers would not be able to afford these mortgages.

Some of the borrowers signed on the dotted line fully intending to pay the loan back, thinking they could find a way to refinance or somehow work things out later. Others signed knowing that they did not have the means to afford the mortgage payment and would eventually end up in a proverbial pickle.

Easy Credit Leads to Mass Foreclosures

There is no doubt that easy credit made the dream of homeownership possible for many Americans. This easy credit, however, also contributed to the housing bubble and is currently contributing to recent increases in foreclosure activity.

Some of the statistics produced by industry sources like the Mortgage Bankers Association (MBA) suggest foreclosure activity in the past decade is running at a rate ten percent higher than at any other time over the past 50 years.

The increase has been a wake-up call to the industry, and has led more than 90 lenders (with more expected to follow) to file bankruptcy. Some of the largest lenders are also tightening their lending standards and cutting back on the number of subprime loans offered.

As you are reading this, you may be wondering why the problems with easy credit weren't recognized and addressed sooner. There are actually several different reasons:

    * Mortgage lenders and investors were making money
    * Borrowers weren't complaining
    * Rising home values masked the problem, allowing people to refinance or sell before foreclosure became an issue

There were also (and still are) too many people willing to look the other way on any shady deal.

How Bad Will It Get

When it comes to foreclosures, the big question everyone's asking now is: 'How bad is this going to get?' Everyone wants to know exactly how many foreclosures there will be and what effect this might have on the housing market.

First, there is no way to predict exactly how many people will lose their home. Of course, there have been many entities willing to try. One of the most widely publicized estimates comes from the Center for Responsible Lending.

The estimate: 2.2 million subprime loans will end in foreclosure in the coming years. The cost of these foreclosures to homeowners? $164 billion.

States like California, Nevada, Florida, and Michigan are expected to get bit the hardest, but no state is exempt in the projections. The latest figures show that there is one foreclosure filing for every 656 households. That number is up almost 100 percent over last year.

The effect that these mass foreclosures will have on the U.S. housing market will be a negative one. The surge in foreclosures will cause home prices to drop which could even devastate entire communities. It's estimated that homes in neighborhoods with high rates of foreclosure could expect a 10% decrease in property values from these foreclosures alone.

In other words, it's going to get really, really bad.

I not one with faith in mere 'markets'. But this might be a case where supply forces a correction, but still remains a demand, and in demand. People still need a place to live. So perhaps this is an exercise of the 'markets'. Excess stock is supplied by fraud - because such mortgages were engaged in by lenders who knew the borrowers did not have the ability to pay but only in the briefest period. And lower prices lead others to try the game all over again, maybe some of the same.

In fact, Chant provided one report of a couple who actually did seem to 'game' the system, by getting out completely from under a $700K debt, rather than go to debtor's prison were such still around. All they suffered was a minimal credit score, which with a few bucks in a few accounts, essentially is quickly forgotten, particularly if ability to pay continues to equate with minimal ability to pay.