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State Ranks High In Foreclosures
"While foreclosures are not at historically high levels, a 42 percent year-over-year increase is certainly noteworthy," said James Saccacio, CEO of RealtyTrac.
"Sometimes foreclosures take place but never make it to the sale, or the process gets stopped," he explained.
There are two major fundamentals that affect foreclosure activity over time: the performance of property prices and the incidence of economic distress, said Richard DeKaser, chief economist for National City Bank. When property prices are moving up, people build equity in their homes, so there tends to be a lower default rate on mortgages, he explained. At the national level, the economic distress on households is extremely modest at present: The unemployment rate is down to about 4.6 percent and household incomes are rising, even when adjusted for inflation.
Carl Tannenbaum, LaSalle Bank chief economist, said one of the biggest predictors of default and foreclosure is job loss and the loss of ability to sustain income and payment streams.
"Obviously, the state of
Nationally, the home foreclosure rate is still awfully low, Tannenbaum said, but the upward trend is not one that economists like to see.
As DeKaser explained, home prices are moving down, so a lot of people who overextended themselves to get into a housing market don't have much of an equity cushion to fall back on, which leaves them more vulnerable to any economic distress that might come their way.
Recent vintages of nonprime and nontraditional mortgage loans show a higher rate of delinquency, according to the Federal Deposit Insurance Corp., and they are another factor driving the increase in foreclosures. Homeowners are facing higher monthly mortgage payments as a result of some of the riskier types of adjustable rate and sub-prime mortgages they took out during the housing boom. When interest rates rose in the spring of 2005, so did monthly payments on ARMs, but many hadn't provided themselves any kind of buffer for potential interest rate adjustments, DeKaser said.
"If we look over the past 20 to 30 years, there has been an upward trend in default rates, and it reflects what some have referred to as the 'democratization of credit,' of which higher-interest, subprime lending is one of the most recent developments," DeKaser said.
Tannenbaum said a lot of borrowers got into the very attractively priced "teaser rate" adjustable mortgages, which start at a low rate and graduate to a much higher rate after a year or two.
"Up until last summer, the Federal Reserve was raising interest rates, so there are a lot of borrowers who have seen their mortgage payments climb," Tannenbaum said. "Even if they still have jobs and income, the payments may have gotten beyond the reach of some borrowers."
In a foreclosure, a homeowner loses equity, suffers damaged credit, and the family often experiences emotional, physical and psychological distress, DeKaser said. For most people, their home is their biggest asset, and when they lose that asset or see its value decline, they're likely to behave differently. In particular, they're likely to spend less and save more, he observed, which could have a secondary effect on retail businesses in the community.
But homeowners aren't the only ones who suffer. Lenders have to absorb the loss for outstanding principal and often have to sell foreclosed homes at below-market prices. Mortgage insurers lose, and cities lose some of their tax base. Furthermore, home foreclosures depress home prices in an area, cast a certain pall over the community, and tend to dampen economic activity of all kinds, from business creation to confidence, Tannenbaum added.
"Worried people don't spend much money, worried companies don't grow and worried investors don't invest their money. All of that is very bad for the economy."