Mortgage Mess: Foreclosures On The Rise

At a foreclosure auction in Bakersfield, Calif., it’s standing room only.

“It’s a tremendous business right now because of the huge amount of foreclosures coming in,” says auctioneer Sam Marshall.  “We’re seeing a lot more inventory from banks that are coming to us needing to reduce inventory.”

The rate of homes beginning the foreclosure process now stands at an all-time high, according to the latest quarterly survey from the Mortgage Bankers Association.  “Households who had adjustable rate loans where payments adjust upward and they’ve seen house prices decline, may find that the value of their loan is greater than the value of their house; therefore they have no equity to lose, and the incentive is to walk away,” says Doug Duncan, chief economist for the Mortgage Bankers.

States seeing the highest rates of new foreclosures are also seeing the greatest declines in home prices from a year ago. Prices are down 27% in Nevada , 25% in Florida and 14% in Arizona and California, according to the National Association of Realtors.

Boom To Bust

The price drops are a big surprise to Maryland homeowner Rick Boardman.  When the tech bubble went bust in 2000, Boardman took his money out of the stock market and put it in something he thought would be safer, real estate.  “We thought it was a good investment, but also something we could enjoy and might change our lifestyle too,” says Boardman.

He and his wife bought 20 acres of valuable waterfront property in Maryland confident it would turn an easy profit.  Boardman remembers the summer of 200 as a time when "everything was just boom, boom, boom, especially on the eastern shore.”

Boardman built two homes; one to sell, which would finance the other, his dream home.  But the $2 million home has been on the market for over a year, and Boardman can’t make the mortgage payments anymore.  Work on his dream home stopped.  “What was our dream has become a financial nightmare.  Our goal now is just to get out with something to pay off the debt,” says Boardman.  “We’ve come to the absolute end of the road.”

Foreclosures today are as varied in price range as they are in location.  “I think what you're going to find is that the mortgage problems that we're talking about are going to hit everybody - from the subprime borrower all the way up to the person with the multi-million dollar vacation home,” says Guy Cecala of Inside Mortgage Finance.  “The bottom line is everybody bought homes based on investments, speculation, a lot of things, so we see a lot of vulnerability across the board.”

Surge In Activity

Foreclosure activity is up a staggering 90% from a year ago, according to online data tracker RealtyTrac.  This includes default notices, auction sale notices and bank repossessions, so the data can include a home more than once. The percentage increases in some areas do not bode well. California, for example, is up 350% from a year ago, -- and that includes the traditionally strong spring buying season.

The Mortgage Bankers report breaks down the numbers by defaults, homes entering foreclosure and homes in foreclosure, and while defaults are actually down slightly, the fact that the rate of homes entering foreclosure is at an all time high, again suggests things can only get worse before they improve.

“What we have right now is an oversupply, and we have a lack of buyers in the market right now,” says Bakersfield Realtor Darrell Sparks.

Inventories for existing homes were up 10% in April from the month before and now represent an 8.4-month supply of homes for sale.  That’s twice the number of homes for sale in April of 2004.  Rising interest rates and tightened credit standards due to trouble in the subprime lending area will certainly not help to clear that inventory quickly.  Cecala has been assuming that fixed rate mortgages would hover around 6.0% - 6.5 %.  "If we start getting near 7.0%, that's a significant rise in a higher rate environment than we've seen in a long time, and that's going to further drag on mortgage volume and it's also going increase the likelihood of delinquencies and foreclosures.”  she says.

But it’s not all bad news.  Eric and Sheila Tomasi are bidding on homes at the Bakersfield auction, hoping to buy low and sell higher once the market settles down.  “It’s unfortunate for a lot of people when they got into situations that they might not have known what they were getting into,” says Eric. “Opportunity is there for us.  We’re kind of lucky that we can be part of this right now.”