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By Rick Sharga, RealtyTrac | Published: 1/01/2009
Not all homes in foreclosure are lost to the banks, but 2008 will probably set a new record in that category as well. Bank repossessions (REOs) in the RealtyTrac database have risen from about 445,000 at the end of 2007 to slightly more than 900,000 at the end of November. These REOs are one of the reasons that the real estate outlook for 2009 is glum: REOs increase the inventory of homes to be sold, and, as distressed properties, have a negative impact on housing prices. This puts more and more loans at risk as property values continue to decline.
Two other factors loom large in terms of foreclosure activity. The first is a massive number of Alt-A and Option Adjustable Rate Mortgages (ARMs). Alt-A loans were intended for borrowers with good credit scores but lacking in some of the required documentation. Unfortunately, it appears that many people who wouldn't have normally qualified for Alt-A loans received them during the early part of the decade. Option ARMs are loans where the borrower is given a choice of monthly payments -- generally a 30-year amortized amount, an interest-only amount and a negative amortization amount. The overwhelming majority of Option ARM borrowers opted to make either the interest-only or negative amortization payments, so they've either paid no principal balance, or worse, now owe more than when they took out the loan.
As home prices continue to decline, it's likely that up to $60 billion of these potentially bad loans will reset as early as the second quarter of next year, and will probably default at the same rate as -- or worse than -- the subprime loans that started this foreclosure cycle.
The second factor is the rising unemployment rate. Prior to this foreclosure cycle, which was driven by hyper-inflated home values and extraordinarily bad lending practices, high unemployment rates were the number one predictor of high foreclosure activity. As the economy sheds jobs at an alarming rate, many out-of-work homeowners will find themselves at risk of losing their homes as well.
It's unlikely that we'll see fewer than 3 million households in foreclosure in 2009. This amount of inventory, plus tax incentives and interest rates of 4.5 percent or less make the market a once-in-a-lifetime opportunity for people in a position to buy. But for sellers, and the mortgage industry, 2009 looks like more of the same bad news.
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