Real Estate & Property Law

Foreclosure Crisis, Widespread Risky Debt

Mortgage foreclosures nationwide last month were down a bit from August’s blistering pace, but were still nearly double the number in September 2006. And, although a so-called subprime mortgage meltdown in certain segments of the country has been widely blamed for the number of homeowners losing the battle to pay their monthly housing bills, the actual problem is much more widespread.

A front-page Wall Street Journal (sub. req.) article today says the popular notion of risky subprime mortgages on unfavorable terms being issued largely to low-income, urban borrowers who are often minorities isn’t true. An analysis of data concerning 130 million mortgages made during the past decade shows that in fact “risky mortgages were made in nearly every corner of the nation, from small towns in the middle of nowhere to inner cities to affluent suburbs,” the newspaper writes.

“We had an aggressive home-mortgage industry trying to get people into homes they couldn’t afford at a time when home prices were very high. It turned out to be a house of cards,” Karl Case, a Wellesley College economics professor told the WSJ. “We’re in the early stages of the cleanup.”

Data from Realty Trac Inc. showed 223,538 foreclosures last month, “including default and auction notices and bank repossessions,” reports Bloomberg. That is an 8 percent decline from August. The highest foreclosure rate was in Nevada, one for in every 185 households in September, followed by Florida (one in 248) and California (one in 253). The national average for the month was one foreclosure for every 557 households.

A combination of features, including artificially low initial teaser interest rates, artificially low initial payments that may not even cover interest, and subsequent “adjustment” to much higher interest rates reflecting the borrower’s less-than-stellar credit mean that some homeowners are seeing their mortgage payments more than double within a few years of purchasing. Especially if they put little or no money down, as many did, and have seen housing values in their vicinity stagnate or decline, as many have, homeowners now have little incentive to make the monumental effort that may be needed to come up with far higher monthly payments.

“The truth of the matter is that borrowers are going into default as soon as they hit their adjustments,” Rick Sharga, executive vice president of marketing at RealtyTrac, tells Bloomberg. The Irvine, Calif.-based company sells foreclosure information.

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