Time For Action - Lets Get in Front of the Next Wave of Foreclosures
January 20th, 2008 Categories: Real Estate News
Why is the sub-prime mess, all of our problems? Each and every one of us?
“I’ve got good credit, I’ll be able to buy anytime,” said a buyer recently. Well yes and no. The video below demonstrates powerfully how this mess affects us all, good credit, ok credit, not so good credit, and why new Fannie may guidelines may be necessary, so watch, it only takes a few minutes…thanks to MortgageReports.com and Dan Green for the video, a history of mortgage guidelines since 2000.
Now I understand the argument for personal responsibility, agree with it, and hopefully have taught it to my children… I believe in personal responsibility. But the issues here go way, way beyond my (or your) desire for personal accountably, let me explain why.
Lets suppose I live in a neighborhood of 103 homes and the average sales price is $100,000. 3 go into foreclosure, just three, that’s less than 3%, hardly a crisis you would say… but lets scratch the surface and look deeper… The 3 homes go into foreclosure, and lest assume they are able to be sold in the winter of 2007-08, at a discount, for $78,000-$81,000. In the spring, 5 home sellers would like to sell their homes. What will their asking price be? Their sales price? Here is the scary thing, if they have to sell, their sales price will be no more than $82-85,000 because the house WILL NOT Appraise for anything higher. 
So each homeowner in the communbity- all 100 good taxpaying mortgage paying families, have conservatively Lost 15% of their home value, in this case, $15,000 each. That is not fair you say, and I’d agree, that is why stopping foreclosures is a paramount value.But the losses continue…the community lost $1.5Million in equity, (100 x $15,000), but city lost $1.5M of its tax base… in the spring the city sends their tax appraiser out and because of the foreclosures, he appraises the houses at $85,000. The city just lost $1.5Millionin taxbase, or at 1% rate about $15,000, about half a starting teacher’s pay.Multiply that by ten, 20, or 50, and you will begin to see a cities plight, but that is not the worst case scenario…Now suppose that the homes foeclose, but wouldn’t sell. No buyers, even at a 20% discount. Soon the grass is overgrown, then the banks board up the windows… Any idea what that does to home values? If you guessed it’s even worse than selling the homes at 80 cents on the dollar, you are correct. In this case, those homes might not sell until you hit $65,000, or 65 cents on the dollar. Now the community loses $3.5 M, and the city, at a 1% tax rate. loses $35,000, or the cost of a policeman without benefits. Now lets say you have 100 communities in your town like this- see the Cleveland example below- that fall into one of the two scenarios above- that means your city is going to have to cut back either 75 teachers or policeman because they just can’t pay their bills…and remember, this is because that about 3% of the homes foreclosed. And this isn’t a possibility, it has happened in 8-10 American cities, see the example of Cleveland below.And the damage isn’t finished there. The reality is these bad loans are concentrated in areas where the foreclosure rate has reached 15%. Boarded up houses invite crime, and formerly good neighborhoods go down the drain quickly. Many of these high density bad loans are concentrated in the rustbelt, and not all were to people who stretched too far, many of the worst loans were refinances to people whose homes were all but paid for, but when the rate reset, they couldn’t afford the loan- and they couldn’t refinance either. Not surprisingly, the burden falls heaviest on the poorest educated Americans, ones not savvy enough to understand the rules, or ones who were lied to by unscrupulous lenders.Cleveland provides a real life example. Something between 40% and 50% of the mortgage loans issued in 2005 were subprime. Today, a little more than 2 years later, Deutsche Bank is the largest land owner in the city. Dozens of working class neighborhoods have been gutted, and city tax revenues with them. The City of Cleveland announced they were suing 21 investment banks- Deutsche and Wells Fargo among them, for $100’s of millions of dollar of lost revenues and costs. We can expect more of that-more Cleveland’s and more lawsuits, if the next wave of 1-2 Million foreclosures take place in the coming two years.Even in Charlotte where home prices increased substantially in 2007, we also suffered a fair number of foreclosures in predictably, higher minority areas of the city. The outside credit conditions still impact us every day- a couple of months ago, a customer with 10% down and credit scores above 700 had to fight for a loan…today, a buyer of a commercial property with 25% down, and a 20 year record of owning investment properties and paying on time, is on the bubble on a property here in “safe” Charlotte. They don’t get it, they’ve played by the rules and done everything the right way. Yet, they are dealing with a terrified lender.
I’m writing our Governor, and US Senators and demanding they start working on some solutions here- fast. I don’t have the answers here- but someone needs to get their arms around this, and do it in a hurry. Otherwise, these years won’t be remembered as the “war years”, but the years the American dream went up in smoke- the smoke of greed and unregulated avarice.
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Terry McDonald, a veteran real estate broker and former builder writes the Charlotte blog, CharlotteCommunitiesOnline.com
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An interesting post South Charlotte Homes For Sale and Appreciation Report.
Terry:
Excellent article and information about Cleveland. I don’t know, though, how successful the City of Cleveland will be in their suit against 21 investment banks. The lenders directly bear the brunt of their mistakes.
And when (property tax) income drops, government belts need to be collectively tightened.
Thanks for the information!
–Roberta Murphy
You definitely give a compelling argument for some sort of bailout Terry. However, I don’t think appraisers would be able to use foreclosures for all their comps. I also don’t think that property tax accessors will either.
Although your numbers might be a little more skeptical than reality, your post has definitely made me think twice about how I feel about government involvement in this mess. Good stuff!
It has already happened in Cleveland and in other cities- here I had a buyer 2 years ago unable to get a home purchase financed because of 2 foreclosures brought the values far down. This is why the Feds are trying to do something- the loss of homeowner equity and tax base is real, not to mention the accompanying increase in crime.
Terry –
You make a number of good points in your post, particularly about the community impact of foreclosures.
The idea that what we have is merely a “subprime” crisis is ridiculous. What we really have is a fialure of the federal government to regulate lenders — a terrible reality given that appropriate regulatory powers have been in place since 1994.
I have been telling people for years, literally, to avoid toxic loans. Now, finally, people get it. Unfortunately, too many people ignored common sense economics and now face foreclosure.
All the best,
Peter G. Miller
www.ourbroker.com
Thanks Roberta, I don’t know who successful they will be either- but these things are expensive, and because of the lack of adequate regulation- as Peter points out- this may be the only instrument-blunt as it is- left to get a some justice.
Peter- thanks for your comments- for those of you who don’t know, Peter is the author of 5 books on the mortgage industry.
Thanks for visiting all.
Terry- I respect your take on this but I have to disagree. I think we need to let the markets sort this one out, and if lenders take a big hit, then so be it. The government has never been good at fixes (see FDR’s socialism, Nixon’s wage price freeze, and the entire Carter admin). I agree that we need to write elected officials, but maybe just to tell them to let the invisible hand of capitalism cull these lenders.