U.S. Foreclosures Double: 1 in Every 171 Households Affected

Hmm, wasn’t this housing bubble crap supposed to be slowing down? Guess not. The foreclosure numbers for last quarter are twice as bad as last year according to the new numbers from RealtyTrac (a firm that tracks foreclosure filings.) 1 in every 171 households nationwide was foreclosed on, received a default notice or was warned of a pending auction in the second quarter of 2008. Bloomberg says this is an increase of 14% from last quarter and an increase of 121% from this time last year.

What does this mean for you? Bank seizures, the final “worst case scenario” of the foreclosure process, depress the values of surrounding properties. One analyst quoted by Bloomberg estimates that 25 million homeowners have properties that are in danger of being worth less than they owe on them.

Bank seizures in the first half of the year increased by 154 percent to 370,179 from the same period in 2007, RealtyTrac said. Last year’s second-quarter data on bank repossessions was not available, according to RealtyTrac.

Forty-eight of 50 states and 95 of the 100 largest U.S. metropolitan areas had year-over-year increases in foreclosure filings in the second quarter, RealtyTrac said.

U.S. Foreclosures Double as House Prices Decline [Bloomberg]
(Photo: Getty)

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  1. stevejust says:

    OMG ROTFL CAN I HAZ A MORTGAGE REFUND? ALL UR HOUZES R BELONG TO US!

    I bought a house in 2004 ’cause I got a 30 year fixed mortgage for 5.3%. I thought the house was overpriced even back then, but I thought the low mortgage would make up for it. I sold the house in 2006 because EVERYBODY by that point should’ve been able to see there was a massive bubble about to burst. If the median and mean incomes can’t afford the median or mean housing prices in a given area, only one of two things could happen: people could magically start earning more money, or the whole cookie could crumble.

    So I sold my house in 2006 before the proverbial stuff hit the fan.

    This is only going to get worse. Not only are people upside down in their houses, a whole big chunk of people are upside down in their cars. So the people who work at car manufacturers and car dealerships are in just as much trouble as the people who were building houses and originating mortgage loans and working at banks that are going to be sized by the FDIC. Because these are huge swaths of the economy, that’s going to cause more people to be out of work, lose their homes, which is going to further weaken the housing sector and financial sector and so on and so forth.

  2. CaptZ says:

    So in other words stevejust……the US is gonna be in a world of trouble sometime in the next couple years…..the rest of the world is laughing at our gluttony and “got to have it now” attitude. Fun times ahead……fasten your seatbelts…..if you can afford one.

    Looks like Bush succeeded in destroying the country afterall……

  3. johnva says:

    I haven’t seen anyone very credible suggest that the housing decline is “slowing down”.

  4. Tightlines says:

    Maybe not Bush per se, but the “I can do anything I want and I don’t have to think of the consequences” cavalier attitude that persisted at the beginning of this century is certainly catching up with us today. The question is: will we learn from our mistakes?

  5. Gopher bond says:

    Huh, my house keeps appreciating in value since I purchased it in 2004, as have others in my neighborhood. Although several families have sold because (I assume) they had crappy mortgages, the houses themselves never took a hit. Where did you people build your houses, on landfills?

  6. Techguy1138 says:

    @testsicles: California

  7. stevejust says:

    @Tightlines: It’s easy to blame Bush per se. Look at what Bush Sr. did with the S&L bailout. (Or more correctly, look at what he did and didn’t do that led to the need for the S&L bailout.)

    And now, junior is facing the same mess with Freddie & Fannie + the failing banks.

    Is this a coincidence? I submit to you, or readers of consumerist, it is not even close to a coincidence. And if you think it’s just a coincidence you’re an idiot. Or Bladefist. (and if you’d like to know the reason for this gratuitous ad hominem attack, look at the last comments here: [consumerist.com]

  8. johnva says:

    @testsicles: Depends on where you are. Obviously, real estate is a local phenomenon. But overall, in most parts of the country, the trend is a sharp decline in prices. The tightening of credit makes that inevitable. And it’s actually a good thing, because prices were way overinflated and need to come down a lot to restore economic balance. If prices haven’t come down in your area, your area probably wasn’t as overinflated as many other places in the first place.

  9. Bladefist says:

    that’s going to cause more people to be out of work, lose their homes, which is going to further weaken the housing sector and financial sector and so on and so forth.

    Winner of the biggest FUD on consumerist. The economy is still expanding. We are inching up and up. So most of us are doing okay. A few aren’t. They did it to themselves.

    Looks like Bush succeeded in destroying the country afterall……

    Nope, Bush is paying his mortgage, and actually his home is more green then Al Gores. Bush is doing his part.

    How you blame Bush for citizens and Countrywide crashing the housing market is beyond me. Would love for you to explain it to a simpleton like me. I’ll be waiting.

  10. Bladefist says:

    @johnva: It’ll get worse before it gets better for the housing market. At some point the Country is going to have to drop this campaign and start raising the fed rate again. And that definitely won’t help the housing bubble any. It’s hard to have compassion for these people. They are really the cause of all of our problems. Each situation is different. Some lied to their lender, some lenders lied to them. Some are dumb. Some are smart, but had a run of bad luck. But they can’t pull us all down with them. Harsh?

  11. stevejust says:

    @Bladefist: How you blame Bush for citizens and Countrywide crashing the housing market is beyond me. Would love for you to explain it to a simpleton like me. I’ll be waiting.

    What is the purpose of a government?

  12. ARP says:

    @CaptZ: I hate to say it, I’m with Bladefist on this one. In the future, please back up your conclusion with your reasoning so at the very least we can debate it. If you think Bush caused this please state why.

    My opinion is that Bush didn’t cause this directly, he just created the conditions for it to happen much easier and much more severely.

    Here are some items to help you out: Iraq war, threatening Iran and Ven. (both major oil producers), failure to address political unrest in other oil rich countries (Nigeria), poor energy planning (BTW-asking OPEC for more oil isn’t a plan), devaluing of the dollar (Fed does this, but he has very direct control over this), failure to monitor banks and the securitization of higher risk mortgages, tax cuts that favored the wealthy (which means that consumer spending stagnated).

  13. legwork says:

    @testsicles: Enjoy it while it lasts. Certainly, the safest areas will go up or stay flat, but nationally more places than not are being hit. SoCal is over 25% down for existing homes, and is widely expected to hit 50% as the recasts double through 2010. That’s like end of the world stuff.

  14. johnva says:

    @Bladefist: I’m not going to blame this solely on Bush, as I think the extent of the bubble was caused by a systemic failure of the financial and regulatory systems. And that was caused by both Democrats and Republicans (some of the roots of this went back to Bill Clinton’s decisions on deregulation, as well as prior Republican Congresses). But failure/reluctance to enforce existing business regulations has been a hallmark of the Bush Administration. If the government regulators had been doing their job, the fraud in the mortgage market, the appraisal and real estate industries, and credit rating agencies would have been cut way down. So while I don’t feel the government is directly responsible, their failure to act sooner to cut the legs out from under the bubble was a major contributing factor.

  15. Grive says:

    @testsicles: Uh… if you compare your house to those of your neighborhood, you’re doing nothing. Usually appreciation and depreciation will shift similarly on a zone. You’re just one of the lucky ones who live in a place not affected by the whole hullaballoo.

  16. ARP says:

    @stevejust: Real nice. Eye for an eye. You post is partially off-topic.

    The question is what are we going to do about it. My opinion is that if we help banks, we need to help borrowers. If we let borrowers sink, then we should let the idiot banks who gave them money sink as well. The “we can’t let them fail” argument doesn’t hold water with me. Reminds me of a [paraphrased] quote from Animal Farm: “all pigs are equal, but some are more equal than others”

  17. johnva says:

    @ARP: I agree, bailouts of banks OR homeowners who made bad decisions will both undermine the good that comes from a decline in prices. Capitalist economies become more efficient mainly when things are in decline and the bad businesses get weeded out. I do understand, grudgingly, that some level of relief may be necessary for people who actually got sensible mortgages and yet suffered a major price decline because of the irresponsibility of their neighbors. I don’t have much sympathy for people who got zero-down ARMs on houses they couldn’t afford after a rate reset and are now paying the price.

  18. dangermike says:

    Foreclosures are the system by which the market is correcting for egregiously bad lending policy and irrational exuberance over borrowing that built the bubble up to epic proportions. Many interest-only, and not just in the subprime category anymore, will be recasting in the next 3-5 years to monthly payments that are untenable compared to wages (in some cases, even exceeding them) to pay off mortgages with loan-to-value ratios of 150-200%. It is unreasonable to expect that anyone can sell themselves out from under an upside-down mortgage with the current pricing winter. So either wages go up to support the prices (inflation) or prices go down to fit the wages (foreclosures). If interest rates start to rise, prices will need to fall more. It’s not rocket science. It’s just simple economics.

  19. stevejust says:

    @ARP: Here’s the argument.

    Let’s start with Bush Sr. and the S&L Bailout, because context is important. The S&L crisis was the failure of about 750 savings and loans. With interest on all the debt the US government floated to pay for the $160 billion dollar bailout, the total cost to us as taxpayers was somewhere in the range of $500 billion. In fact, we’re still paying for that first S&L crisis.

    One of the principle reasons for the failure was that with deregulation, some of which was needed, came an utter kind of anarchy and rational, reasonable government worried about what would happen at the end of the day would have stepped in to correct. When Regulation Q stopped functioning, the government should have taken action to alter, amend, strengthen it.

    Because the S&L crisis is SO DAMN SIMILAR to what we’re staring at right now as we speak, I can’t really figure out why no one is talking about it. It was one of the biggest economic FUBARs in this country’s history and it’s being repeated as we speak. (Or more correctly, it was being repeated from about 2004-2008 when the government should have been doing some governing.)

    Instead, the Bush administration seems only to be able to put out b.s. stories about how we’re not in a recession, leading people like Bladefist to accuse me of making the biggest FUD on consumerist.

    If I were the President in about 2005, I would’ve said we need make Alt-A loans illegal. We need to inch up interest rates, and we need to ensure that Freddie and Fannie, the GSEs are adequately capitalized before we continue taking on these potentially toxic mortgages.

    One of the reasons I would’ve done all this is because I REMEMBER WHAT HAPPENED WITH THE S&L CRISIS.

    If I had done that as president, Moody’s and other companies doing the ratings would’ve gotten scared. Bern Sterns would’ve stopped in their tracks, because someone would have been a voice of reason in the frenzied orgy that was, the “get this loan, process it, make our fees, and sell it to some poor unsuspecting pension fund ASAP” way of doing business as SOP for the last three or four years.

  20. Grabraham says:

    Establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our posterity.

  21. johnva says:

    @stevejust: While it may just be paranoia, the similarities to the S&L crisis do bother me quite a bit. It almost makes it seem like a deliberate raid on taxpayer dollars.

  22. Techguy1138 says:

    @ARP: Saving the borrowers will save the banks. The banks are having difficulity because people aren’t paying their mortgages. If most of the people in default started to pay the banks would be righted.

    The same can not be said for the banks. Saving the bank without helping the owner is stupid. It gives the banks ownership of HUGE swaths of Amercia while kicking regular people to the curb.

  23. Bladefist says:

    @stevejust: The purpose of government is clearly written in the Constitution, the bill of rights, etc. Nothing in there about regulating the housing market.

    @johnva: I say let’em fail. It’s an investment game. The borrowers are investing in a home, hoping it out performs, the lenders are investing in themselves, and in the homes. All made bad investments. Usually, when you make bad investments, you lose a ton of money. They took risk that the houses would continue to gain value, so if the lenders were lame ducks, they could still get their money back. oops

    @Grabraham: Right-o.. The right to pursue happiness, includes the right to try to buy a house you cant afford, and get put on the street.

    @ARP: I would ignore him. But you are right on target. There is a few key industries that can do whatever they want, and washington is there to save them. Countrywide is more equal then the rest of us.

  24. johnva says:

    @Techguy1138: And even better, it gives them ownership on the taxpayer dime. That might be the plan.

  25. sleze69 says:

    @CaptZ: So in other words stevejust……the US is gonna be in a world of trouble sometime in the next couple years…..the rest of the world is laughing at our gluttony and “got to have it now” attitude.

    I’m not sure you understand global economics. When an economic power like the US has financial problems, the WHOLE WORLD has financial problems.

  26. Bladefist says:

    @stevejust: I’m sure you know the technical definition of a recession. As you know, our GDP has increased, between 1% and 2% per quarter. That is not a recession.

    Just like the article yesterday, which I don’t want to continue, I am looking at technical definitions. Sorry. I’m technical.

    Lets use the right terms. Our housing market is in a recession. Yay. Easy? Our national economy is not.

    I’m against re-defining words to make people think things are worse then they are. Lets be accurate. Inflation is crazy. Commodities are through the roof. The dollar is weak. Yet the economy climbs. Be proud you live in a country with such a resilient economy. It takes more then a couple crashes to cause a ression.

  27. johnva says:

    @Bladefist: So you’re against all regulation of the housing market (that’s a VERY radical right-wing position that very few Republicans or even Libertarians take)? Regulation exists for a reason, and the fallout from things like this is exactly the reason. I agree, for the most part, that people who make bad investments should be allowed to fail. But I also feel that government has a responsibility to regulate so that innocent people that did not make stupid investments don’t get dragged down by the idiots around them so much. Even people who got fixed rate mortgages that they could afford are adversely affected by this, because some of them are now under water on their loans (due to the decline in prices) and cannot sell their houses without bringing more money to the table.

    What I would prefer is that we get some regulation in place like what we have in the stock markets. There should be prohibitions on buying houses with 100% financing and no other collateral, just like there are regulations against buying stocks totally on margin with no money put up to cover losses. Those regulations were put in place precisely because a major contributing factor to the Great Depression was a similar situation to what we have today with real estate, only with stocks.

    Yes, the market will correct itself if we let people fail and remove regulation. But it will also hurt a lot of innocent people in the process, including those who had nothing to do with the bad investments. And anyway, it seems like the financial industry sees these periodic real estate crises as golden opportunities to raid the Treasury for a few hundred billion dollars.

  28. dragonvpm says:

    @johnva: Is that really the case in most of the country? I was under the impression that it was just certain markets that were seeing the really painful pricing corrections (e.g. CA, Las Vegas, AZ, FL) and most other areas in the US were just seeing problems that resulted from people being unable to get mortgages.

    In and of itself, people not being able to qualify for mortgage won’t automatically tank your property values, that doesn’t happen until one of your neighbors who HAS to sell decides to sell for less than current market value (thereby resetting the market value in the process).

    I know here in west Texas, property values are still climbing at their usual snail’s pace, houses are just staying on the market a decent bit longer and you’re not really seeing bidding wars the way you did during the worst parts of the bubble. Fortunately since houses aren’t leaving people horribly upside down in their mortgages, the amount financed actually forces people to sell at prices that will at least cover what they owe (as opposed to knowing you can’t possibly sell for that much and having to consider foreclosure).

  29. Jean-Baptiste Emanuel Zorg says:

    Just to put it all in perspective:

    Source: [bubbletracking.blogspot.com]

  30. Bladefist says:

    @johnva: I’d be in favor of better regulation. Maybe not more regulation, but just better oversight of the current ones. I was saying, after-the-fact, let’em fail.

    My comment about the constitution and such, was merely to point out, that too many people blame government, and rely on government. Sensible regulation is fine, but ultimately you need to rely on yourself and protect yourself.

    The government in my opinion needs to regulate in a way to only protect the basics from happening. But personal responsibility is a big thing in my book. Government is terribly inefficient. They spend millions in getting legislation to regulate certain markets. After they get it, they fail to do the regulating. Government FAIL is more the rule then the exception. My message is: Don’t rely on the Government. Treat them like Batman. When you are in need, they may or may not show up.

  31. johnva says:

    @dragonvpm: Obviously some places are way worse than others. But the unavailability of credit will indeed decrease prices eventually, if it continues. Places that didn’t run up prices as high will have far fewer problems.

  32. steinwaytony says:

    Don’t get your pants wet, Consumerist. It’s a little over a half percent of households — households, that is, not families. That would include the would-be flippers with libraries of properties.

  33. johnva says:

    @Bladefist: I think we mostly agree on this (though we might disagree about what kind of regulation is needed). I do think that preventative regulation is the way to go, rather than bailouts after the fact. I just wonder if government’s failure to do this has to do with the fact that powerful interests in the financial industry have profited greatly off of this whole “crisis”. They got to make risky investments and make a mint on them for a few years while the bubble was building, and now the government has to step in and clean up their mess. It just seems very…deliberate to me. Government was working on behalf of crony capitalists rather than the rest of us, and anti-government, anti-regulation ideology was the vehicle they used to perform the theft.

  34. Bladefist says:

    @johnva: I’m not sure if anyone in government is smart enough to pull that off :) But, like I said, I wouldn’t trust’em. Americans need to be as independent as possible, and pretend Government regulation isn’t even there. Because it may not be.

  35. Jean-Baptiste Emanuel Zorg says:

    @Bladefist: The purpose of government is clearly written in the Constitution, the bill of rights, etc. Nothing in there about regulating the housing market.

    We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

    So actually, regulation of the housing markets to protect the wellbeing of we, the people, most certainly IS one of the purposes of our government.

  36. johnva says:

    @Bladefist: I don’t think the government was necessarily that smart, but I think the financial industry and their lobbyists might have been. “Interesting” that Neil Bush was so deeply involved in the S&L crisis, and now we have a similar situation under his brother’s Administration.

    But I don’t disagree with your main point. This is why I didn’t take out one of these high risk loans even when people were doing it all around me and I could have easily gotten one.

  37. Bladefist says:

    @TinyBug: Saying “Promote the general welfare” means housing regulation is a bit much. General welfare is defined differently by each individual.

    General welfare to some might be, provide me a car, a house, and spending money. To others it could mean, socialism. To others it could mean walk around w/ a smile.

    Lets not over analyze.

  38. stevejust says:

    @Bladefist: I’d be in favor of better regulation. Maybe not more regulation, but just better oversight of the current ones. I was saying, after-the-fact, let’em fail.


    My comment about the constitution and such, was merely to point out, that too many people blame government, and rely on government. Sensible regulation is fine, but ultimately you need to rely on yourself and protect yourself.

    But how much did the S&L bailout cost you? How much is the current bailout going to cost you? How much is the war in Iraq costing you? You’re a pansy whiner when it comes to “liberals” and their “social programs” that cost you a bunch of money, but when Bush Sr. and Bush Jr. come along and take YOUR MONEY you just shrug it off? I can consistently predict that republicans will TAKE MORE MONEY from me than democrats. It happens every time.

    I benefit to some extent by Bush’s tax breaks. But in the long run, I have to pay for them the way we all do. So, while it might be nice in the short term, I worry about the rest of my family who don’t make as much, I worry about my friends who don’t have money…

    If you say there should have been regulation, I absolutely agree. Who’s job was it? Congress? Or the EXECUTIVE BRANCH OF THE GOVERNMENT?

    I didn’t ask what the purpose of the U.S. government was. I asked an abstract question with an easy answer. The purpose of the government is to govern. When have a president that’s only good at taking vacations, this is what happens. Is it Bush’s fault Glass -Steagall got repealed? No. Clinton signed it, in no small part because of the strength of the Republican congress which was forcing it down his throat. But is it Bush’s fault he didn’t to anything when it started to become a problem? Yes.

    Finally, okay I’ll admit we’re not technically in a recession. But I’ll admit that only if you admit that if I beat your brains in and you were stuck in a catatonic comma, I don’t think you’d care whether you were “technically” dead or not. The technicality doesn’t matter much at that point.

  39. Jevia says:

    Re: the S&L crises with Neil and George Bush, SR and now the housing/credit/foreclosure crises with George Bush, Jr. I smell another Michael Moore film in the making.

  40. Bladefist says:

    But I’ll admit that only if you admit that if I beat your brains in and you were stuck in a catatonic comma, I don’t think you’d care whether you were “technically” dead or not. The technicality doesn’t matter much at that point.

    Want everyone to see that analogy.

    The Iraq war costs me money, but I support it. The rest of your comment, respectfully, is too unorganized and extreme for me to take seriously.

    @steinwaytony: You pose an excellent point. I think the media, not so much consumerist, big media wants us to think Jim and sally, the 4 kids, and the pet dog are all losing their home. And I’m not saying there aren’t some. A majority of the people losing money in this is all the investors. It was a bad investment.

  41. @sleze69: The U.S. economy is losing a lot of influence on the world’s economy. Plenty of economies are doing well right now regardless what happens in the U.S. Heck. New York City is weathering the bubble by the tourism the cheap Dollar is bringing. I realised the housing crisis may never hit New York City when I walked by a real estate office and the apartment listings had their prices in Euros.

  42. Jean-Baptiste Emanuel Zorg says:

    @Bladefist: Saying “Promote the general welfare” means housing regulation is a bit much. General welfare is defined differently by each individual.

    Are you intentionally trying not to understand? People have different ideas of what “insuring domestic tranquility” means, as well. And they certainly have different ideas about what needs to be done to “establish justice.” That’s why we have a document that explains exactly how our government will go about actually doing those things.

    As for who gets to decide what those phrases mean, the people we elected decide that every time they create a new law. We tell them what we think it should be when we vote. Or when we write a letter to the editor. or when we call their offices. Seriously, this is like fifth grade civics here. The preamble explicitly lists the purposes for which our government exists. The entire rest of the document explains exactly what they may and may not do to achieve those purposes.

    So if the Representatives and Senators we elected decide that regulating the housing market is necessary to promote the general welfare, then it is.

    Lets not over analyze.

    Apparently you feel that actually understanding the purpose, scope, and intricacies of the Constitution is “over analyzing”. Since your argument apparently boils down to “I don’t see the words ‘housing market’ in there, so they can’t do it”, I’m not surprised. Frankly, your level of understanding of the Constitution is on par with that of tax protesters and creationists.

  43. ludwigk says:

    @Bladefist: Stop spreading FUD about Al Gores house. He was completing a 3-year renovation on his 80-year old house to get LEED Gold certification, indicating a level of efficiency and greenness that only a handful of homes in this country has. George’s house doesn’t qualify.

    George built his house new with a lot of great eco-enhancements, and that’s a wonderful thing. Al Gore had to retrofit them in, and it took years to complete.

    100% of his power consumption is from green power sources, such as solar, wind, and methane. All of the excess emissions from his lifestyle (I’m assuming to the best he can calculate) are offset by green credits, so that his consumption is carbon-neutral.

  44. ravensfire says:

    Has anyone taken note of all the short sales abounding? At least in
    the DC area, it seems like most of the homes for sale are currently
    short sales and not foreclosures. I understand that a short sale
    usually means something, but it does not seem to in the current
    climate. A current short sale basically isn’t for sale at all as far as
    I can tell. Anyway, case in point, all these short sales that aren’t
    currently in the numbers will be in the foreclosure numbers shortly.
    Current foreclosure numbers seem to be a very poor indicator of how bad
    things really are, better include all of the short sales too. Sure a
    few rare short sales do actually sell but thats definitely not the
    norm…including them in the numbers would be a more accurate count.

    And the plot thickens.

  45. johnva says:

    @Bladefist: I’d like to see some evidence re: whether the majority of the foreclosures are flippers and the like, or not. I’m sure a big chunk of them are, but I’m not convinced it’s the majority without seeing some hard numbers. These numbers should exist, if statistics are kept on how many of the loans are for primary residences.

  46. waystland says:

    what about this artical from 2006 nice read…”we are not worried….”
    [www.nytimes.com]

  47. waystland says:

    July 15, 2006
    Your Money
    Keep Eyes Fixed on Your Variable-Rate Mortgage
    By DAMON DARLIN
    The raising of interest rates on millions of adjustable rate mortgages over the next several years has all the makings of a classic horror story.

    As home prices appreciated from ridiculously high to unbelievably higher, more Americans began using mortgages that allowed them to buy more house for less of a monthly payment. Next year, a large portion of those rates move up and homeowners who opted for the exotic mortgages could find their payments doubled. Talk about bloody. They need to find a way to minimize the pain.

    Many will refinance their loans. But for others, whose mortgages now exceed the value of their homes or whose debt payments exceed 40 percent of their incomes, there may be no other solution than to get out of their houses. With the housing market cooling, selling it may not be easy. Some may default on their loans.

    With more homes on the market, prices could begin to fall. That reduces home equity – the difference between the amount borrowed and the total value of the home – and could force people whose loans change in 2008 and 2009 to consider selling, further accelerating the drop in prices. Some of those cities with the highest proportions of interest-only loans are also at the greatest risk of falling prices.

    Mortgage lenders, however, say they are not worried. Economists say even the worst-case outcome will not have much impact on the overall national economy. Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions, points out that mortgage industry losses of $110 billion spread over several years would amount to a mere 1 percent of the total national homeowners’ equity of $11 trillion and a hiccup in the gross domestic product

    On a personal level, however, there is going to be pain as homeowners struggle to make higher payments. In 2003, of all new mortgages, 10.2 percent were interest-only, meaning the homeowner paid only the interest for the initial period of the loan. According to Loan Performance, a research firm, 26.7 percent of all loans were interest-only last year and another 15.3 percent were payment-option adjustable rate mortgages, which allow homeowners to choose how much they paid each month.

    In some areas of the country where homes are expensive, these loans were highly popular. In most California cities, as well as in Denver, Washington, Phoenix and Seattle, interest-only loans represented 40 percent or more of all mortgages issued in 2005.

    Traditionally, interest-only loans and adjustable-rate loans were used by people who expected to live in a house only a short time, but such loans have turned into “affordability products” as housing prices rose. The interest rate on the loans, while below that of conventional 30-year fixed-rate mortgages at the beginning, resets after 3, 5, 7 or 10 years, depending on the loan. So, homeowners who took out loans in 2004 could find, for example, that their initial 4.25 percent loan climbs to 6.25 percent or 7.25 percent next year.

    Someone now paying $350 a month for a $100,000 interest-only loan could be facing payments of $680 both because of the shift to the higher rate and because the borrower would have to start paying off the principal as well as the interest.

    “You need a couple of good pay raises in order to afford it,” said Mark Fleming, chief economist with CoreLogic, which develops risk models for the mortgage lenders. “It’s pretty hard to deal with a payment shock of 80 percent or 90 percent,” he said.

    The mortgage industry is not worried about payment shock. Why?

    “It offers an opportunity,” said Brad Brunts, managing director of portfolio management at Citi Mortgage, a unit of Citigroup.

    He, like others in the mortgage industry, sees the higher payments as a boost to the flagging mortgage refinancing business. Lenders will adjust about $500 billion in mortgages this year and $700 billion next year, according to Freddie Mac, the quasi-government agency that repackages mortgages for investors. Expect to find the mailbox stuffed with refinancing offers.

    Mr. Brunts said only a minority of mortgage holders will face real problems. Most will successfully refinance and though they will pay more, he thinks they will be able to make the payments.

    Anyone with a rate that will increase in the next few years, however, ought to worry. If homeowners have an adjustable-rate mortgage, they can hope or pray that there is a recession severe enough for the Federal Reserve Board to lower interest rates. But they would also have to hope or pray that the recession was not so severe that they lost their jobs.

    Hoping or praying is not a useful financial strategy, if only because most economists think that rates will climb a bit more and then stay steady through 2007. No one can say with any certainty whether rates will rise or fall in 2008 or 2009.

    Here is more practical advice. First, homeowners should take a look at their loan documents to determine when it changes and by how much. In most cases, the rate cannot go up more than two or three percentage points a year.

    That is still a lot. The next thing for an owner to do is take a deep breath and figure out what the monthly payments will be when the rate moves. Any number of mortgage payment calculators on the Web can help. Hard as this may be to face, homeowners should not ignore it. Those who get behind on payments can ruin their credit ratings and then it will be even more difficult to refinance the loan at a reasonable rate.

    “It all depends on the ability to refinance before the interest rate resets,” said Suzanne Mistretta, senior director of Fitch Residential Mortgage, which analyzes credit risk of mortgages. “Most of them will get out. Hopefully, they will get out,” she said. “That is the big question.”

    Mortgage delinquencies and foreclosures are still low nationwide and in the coastal states where prices appreciated the most. In the last year, the highest portions of homeowners who fell behind in payments were found in regions where homes were least expensive like the South and the Rust Belt states. But lenders expect the numbers will go up across the country even if they never hit crisis levels.

    In most cases, homeowners will probably want to refinance the loan because the rate on a new loan will be lower than the reset rate. The best option may be a fixed-rate mortgage. In contrast to three years ago, the difference between interest rates on fixed-rate and adjustable mortgages has shrunk.

    Rates vary by the amount borrowed and where the house is, but a 30-year fixed-rate mortgage was averaging 6.74 percent this week, while an adjustable-rate loan that will not change for another five years was 6.33 percent. The initial, or “teaser” rate for a new five-year interest-only loan was advertised as 5.5 percent to 7 percent.

    Lenders never cease to be creative. They keep coming up with new flavors of loans: 40-year fixed-rate loans that offer lower payments, but that cost more over the long run, or 30-year interest-only loans in which only interest is paid for the first 10 years. The only way to know which one to choose is to make the lender calculate the payments for every option.

    Homeowners should start exploring the refinancing options about six months before a loan changes. Lenders say there is little reason to do it earlier. Payments are lower with the interest-only loan and, presumably, those holding the loans are saving the difference. At this point, if rates stay about the same or do not go much higher, there is little advantage to acting too far in advance because the payments will just go up sooner rather than later. (But homeowners should spend less elsewhere right now. They may as well get used to the drill; they will need the savings to cover the future higher payments.)

    Sometimes, though, homeowners may have to take more drastic steps. The lender may not be interested in refinancing a home loan when the value of the home is below the loan amount. That could happen because a homeowner took out all the equity in a previous refinancing. (Freddie Mac estimates that Americans took $556 billion out of their homes through cash-out refinancings and home equity loans since 2004.)

    It could happen if the price of the house has fallen or if the owner has been making only the minimum payment on a payment-option loan so that the loan balance has actually grown. (It is what the industry calls a negative-amortization loan). The best option then is probably to sell the house and scale back. Homeowners may also want to sell if they can clearly see that there is no way they can make the higher, refinanced payment.

    In that case, it is better to act now before a few million other interest-only mortgage holders dump their homes on the market.

  48. Bladefist says:

    @johnva: Yea me too. I’ll admit my assumption there was from the gut. I’m a colbert fan.

    @ludwigk: [www.snopes.com]

    Sorry to burst your bubble man.

  49. Techguy1138 says:

    @johnva: I do not like your ideas for regulation.

    “. There should be prohibitions on buying houses with 100% financing and no other collateral”

    I find this to be very incorrect. The house should ALWAYS be sufficient collateral for the loan. I see no reason why 100% financing is bad on properly appraised assets.

  50. Bladefist says:

    @Techguy1138: Problem is you cant trust appraisals. For some, its purely judgment.

  51. Techguy1138 says:

    @Bladefist: “General welfare to some might be, provide me a car, a house, and spending money. To others it could mean, socialism. To others it could mean walk around w/ a smile.”

    HA!

    While your at it some people think having the government record all of their phone and electronic communications is reasonable search. So since it is a reasonable search the 4th amendment doeen’t apply.

    “Lets not over analyze. “

    This directly impacts with the “Life, liberty and the pursuit of happiness” that is in the United States Declaration of Independence.

    So Yes even as far back as BEFORE the founding of the United stated and the current constitution the government ahas been involved in regulating property and housing law.

  52. Techguy1138 says:

    @Bladefist:
    Exactly. An appraisal is a judgment that banks use to asses the risk of a loan.

    Banks are not guaranteed that home prices will stay the same or rise just the same as consumers. However if the house is worth close to what the home is appraised at the bank will come out ahead.

    In a world where banks don’t get bailouts banks will work for fair and accurate appraisals of home prices.

    The regulation that I’d like to see is that a bank issuing a mortgage is required to keep at least 51% so that they are vested in the the property and there is a legal entity that can negotiate contract changes if need be.

  53. trujunglist says:

    @Bladefist:

    While I disagree with this type of directly personal attack (really, if you dislike someone that much, ignore them, don’t talk about beating their brains in, especially over the internet), I still think you’re completely wrong.
    Technically, Bush should be impeached and tried for starting a war on a (several) completely false premise(s). Technically, Tricky Dick II should be in jail for CIA leakage. Technically, Karl Rove should be there too.

  54. pastabatman says:

    @Bladefist:
    how come your definition can mean “anything” and tinybugs’ can’t?

    “Pursuit of happiness”, to you, includes buying a house you can’t afford and getting booted from it, but “promote the welfare” doesn’t include regulation? you bet it can.

    Regulation isn’t punishment. It’s INTENDED to create a “fair” environment for said business. It INTENDS to …..promote the welfare…

    Now. whether a specific regulation does that or not is a separate issue.

    In the end of all of this, no matter how you slice it, or who you blame, tons of people on both sides (lender/borrower) pushed the limits of sanity, morality, and even in some cases legality for cash.

    You can have your technical definition of a recession and run with it for now if you want. Who knows, maybe we’re fine-ish. The current “trends” that nags me the most are 2 things:

    1. Incomes have not risen with inflation over the past 8 years.

    2. The separation of wealth that we have today has not been seen since the Depression.

    I don’t know exactly what that means or how that impacts us right now or in the future, but it does make me think of the massive debts creeping around the economy in all different places.

  55. johnva says:

    @Techguy1138: Well, that depends on whether the market is going up or down, now doesn’t it? An appraisal might be accurate at the time, but then the house could lose 25% of its value the next year if the market goes down. If down payments are required, the risk is much less.

    But yeah, I agree with your other proposed reforms. Part of the problem seems to have been that banks were profiting from making bigger mortgages and then securitizing the loans and passing the risk off to someone else. This broke the system that provided a larger incentive for them to not make bad loans.

  56. Techguy1138 says:

    @johnva: That is exactly where I see the problem also. People have always been irresponsible.
    In the past banks had incentive to not give them money.

    Now they profit greatly by making loans well beyond the value of the collateral to people who can not repay them.

    The market would have less bubbles if the banks had to determine what the future market risk would bring.

  57. MorrisseyTheCat says:

    Apparently the ungrateful slugs who got an “Extreme Home Makeover” home, decided to take out a $450,000 home equity loan on it, are facing foreclosure, and if that isn’t skuzzy enough, I heard on the news today that it seems to be “going away” after they talked to the bank. ARGH! [www.accessatlanta.com]

  58. powerball says:

    The problem with housing is they cost too much.

  59. bobacus says:

    Ok Bladefist lets look at the things that have been “de-regulated” or have been “free-marketed” by the republicans.

    Health-care
    Housing
    Banking
    Energy
    Business practices
    Business taxes
    Lobbying
    Election rules
    the constitution

    Wow all these are in great shape right now. I am sorry you have bought in to 30 years of Republican propaganda (democrats aren’t any better) But you have to admit ALOT of the issues we have now can be directly attributed to a Republican.