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Realty Viewpoint: Foreclosures Caused By More Than Subprime Loans

Posted by admin under: Main Feb 18

With FHA, Freddie Mac and Fannie Mae conventional loan limits being raised to nearly $730,000, the housing industry should be breathing a sigh of relief. Or are new conventional loan limits just a bandaid on the huge foreclosure wound?

A new coalition of mortgage lenders called Project Lifeline aims to help homeowners who are 90 days or more behind in their mortgage payments. The program includes a 30-day pause to give homeowners and their lenders time to work out a payment or loan modification solution.

Other homeowners can refinance their high-risk loans into conventional loans, and the higher loan limits will allow more homebuyers access to conventional loans.

But will that slow foreclosures?

Some believe the foreclosure crisis, such as the crush of foreclosures in Southern California aren’t being caused by subprime loans, but by homeowners who are simply walking away from homes with negative equity. They could make the payments. They just don’t want to. Why are they being pressured by price? New homes that aren’t selling.

“If you look at the hardest hit areas, you will see they are the areas with the most dramatic growth,” says Sean O’Toole, spokesperson for ForeclosureRadar.com. “In Stockton, for example, there is an unsold new construction inventory of over 7,000 units (source: Hanley Wood, includes improved lots), yet only 150 homes (MLS) selling each month. That has put serious downward pressure on pricing — with builders leading the charge on discounting to get existing inventories sold.”

A recent study by the Boston Federal reserve found that downward pricing pressure is the primary cause of foreclosures — not subprime loans.

O’Toole points out that Realty Times noted a correlation between the date range of loans in foreclosure and the origination of risky loans, but he says the date range of loans in foreclosure also correlate with being upside down (prices have fallen to 2005 levels).

“As we think about how to get out of this crisis, I think we should all focus on the core problem — price declines due to too much inventory. Without action this problem will get worse before it gets better. We added 60 percent more REO’s to existing inventory in January than we did in December (exclusive ForeclosureRadar.com data). Ultimately, of course, it will self-correct even without intervention, with prices falling until the rent/price relationship comes back into historic norms.”

Source: Realty Viewpoint: Foreclosures Caused By More Than Subprime Loans

Monday, February 18th, 2008 at 12:11 pm and is filed under Main. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.