In a post I made a few days ago: Foreclose Already So We Can Get Back To Normal, RealtyTrac’s blog: foreclosurepulse, the people that bring you national foreclosure statistics every month, shed some light on the correlation between exotic mortgages (option-arm, interest only, etc.) and foreclosure rates in their post ARM’d and Dangerous? [ForeclosurePulse].

I had questioned why the Midwest seemed to have more foreclosure activity than the east and west coasts where more price appreciation has occured, and specifically the west coast, where there are higher loan to value ratios on average and greater use of exotic mortgages.

RealtyTrac says theres more to it than that.

The common assumption (aka mine)

a popular bias these days towards directly linking the rising foreclosure rates to default rates on some of the higher risk loans that have become increasingly popular – ARMs, interest only, negative amortization, etc. There’s undoubtedly some truth to that: high risk loans are more likely to be defaulted on than traditional loans

What is likely happening we’d probably look at the Midwest rates and chalk them up to higher-than-average unemployment rates (a very strong predictor of foreclosure rates) and lower-than-average house appreciation rates coupled with weak housing demand. That’s a pretty reliable formula for high foreclosures: No job + no equity + no homebuyer = distressed homeowner.

We should be concerned with the looming re-sets next year to the tune of $1B and keep our eyes on California due to the loan volume, high housing prices and heavy use of exotic loans.

I’ll look to RealtyTrac’s ForeclosurePulse to keep me informed on this topic in the future.

Home Foreclosure Rates Soar [NYP]
Which End Is Down? The Problem With Foreclosure Stats [Matrix]



One Response to “Foreclosure Formula = No Job + No Equity + No Homebuyer”

  1. Anonymous says:

    I think the amount of ARMS that are re-setting this year is over $300 billion, and next year over $1 trillion, not $300 million and $1 billion. Think about it, todays report on existing home sales show an annual rate of 6,920,000, multiplied by the mean price of $266,000 results in total sales of existing homes of over $1.8 trillion. Total housing stock is probably 5 – 8 times that number, so the amount of mortgages out there, and thereforethe number of ARMS must be in the billion and trillions.