Mortgage Foreclosures
Unless you have been under a rock for the last few weeks, you no doubt have heard the collective claim that “The Sky Is Falling” in the subprime mortgage sector. While there is no doubt the industry is in turmoil, the claims that it will impact the rest of the US economy are overblown by people who thrive on fear!
As you know, the subprime mortgage industry made its money by doing one simple thing . . . loaning money to people with less than perfect credit. Now, we all know that people with poor credit pose a risk – so my question is where were the fear mongers a few years ago when the real estate market was hot and everyone and their mother were buying and speculating on real estate? They certainly weren’t complaining when the industry made it possible for thousands and thousands of people on the bottom of the economic scale, the poorest of our society, to achieve the American dream and buy a house!
My ”Chicken Little” friends in the press are worrying that the default rate for these home buyers is going to climb and then destroy the entire US economy. I’m not convinced. A recent study notes that they expect 1.1 million foreclosures from the jump in interest rates and increase in monthly mortgage payments – no doubt these will impact poor people the most. Now 1.1 million foreclosures is a lot of homes but this isn’t going to happen all at once . . . this will take several years to work out.
Now for some simple math. If all 1.1 million homeowners were foreclosed upon at once (which will never happen but lets just pretend), that would probably be close to $300 billion in losses – that is a huge number. But now don’t forget that when a house is foreclosed upon, the bank gets to take it back and resell it! Now lets just assume that the banks sell these foreclosed homes dirt cheap, at a 40% discount. All told, the banks would loose almost $120 billion dollars. That seems like a lot of money but remember how big the United States is . . . that $120 billion dollar loss is less than 1% of all of the mortgages outstanding!
The problems in the industry are real, and many of the lenders who loaned lots and lots of money to high risk people are going to be paying for it. Some of these companies are going to go bankrupt. However, the vast majority of mortgage lenders out there are going to survive this and come out even stronger in the long run. So keep your eyes out for good companies who get caught up in the craziness– now may be your opportunity to buy them on the cheap!
Category: Real Estate
