Figuring out a solution to the foreclosure crisis is turning out to be a divisive issue. Nobody wants to see people get kicked out of their home, but as my wife said reading the paper yesterday “Can I get a reduction in my mortgage too?”
Congress is presently debating Rep. Barney Frank’s proposal and others to offer federal funds to restructure home loans. The Bush Administration says its against such a widespread bailout. FreedomWorks, a Libertarian non-profit with former House majority leader Dick Armey at its head, is busy drumming up opposition to such a bailout. Their AngryRenter.com Web site says its generated 44,000 emails from folks protesting the bailout to the White House.
They’ve got a funny video as well, telling the story of one guy (Bob) who bought more house than he could afford and a woman (Sally) who saved her pennies in the hopes she could buy a home down the road. “Tax Sally to bail out Bob?” the video asks. It’s what the site calls “Mortgage Loan Welfare.”
Everyone knows the price of foreclosure on home owners. They lose a place to live, their credit rating, whatever down payment they made, their hopes, their dreams.
New numbers from ratings agency Standard & Poors spells out the cost to mortgage investors. For the 2006 vintage of subprime loans it’s about 19% of the loan amounts outstanding.
How do they get those numbers? S&P figures an astonishing 42% of the loans made that year to borrowers with bad credit will go into foreclosure. Then it calculates that about 45% of the amount owed on those loans will be lost. Here’s the breakdown on that: 19% is lost due to the decline in the market value of the home. That’s about a $40,000 loss on a typical loan of $210,000.
Then there is the 26% lost to the costs of foreclosure. It can take a year or more to go through the whole process from when a borrower stops paying to when the house is finally sold and the lender recoups whatever money it can. There’s 13.6% of the loan amount lost in interest payments. About 3% of the home value the lender has to pay in property taxes. There’s 1% in legal fees, 6% to real estate agents, about 3% of the loan spent on home maintenance.
Nobody wins.
Amid all the horrendous news on housing, one heart-warming thing about writing for this blog is seeing readers come to the aid of other readers. The best example is the long string of comments on The new exit strategy: A short sale, which was written by Dean Foust on March 5, 2007. Dean's original item, good as it was, barely scratched the surface. What made it special was the string of 304 (and counting) questions and answers from you, the participants in Hot Property. The helpfulness was apparent right from the start when "Lord"--one of our regular contributors--wrote this:
The IRS will treat this as income and tax you on it. Even if you can afford it, short sales and deeds in lieu of also stay on your record. Bankruptcy can clear the slate at least if no workout is possible.
I thought about this when Pete Flint (pictured), the CEO and co-founder of Trulia, the San Francisco-based real estate search site, visited BusinessWeek earlier today to speak with me and Prashant Gopal. Flint talked about Trulia's launch of an ad network, but what struck me the most was what he said about the rapid growth of Trulia Voices, a forum for people to give and get local real estate advice. Flint says that it already accounts for about 10% of Trulia's traffic and is the fastest-growing portion of the sight.
Here's what Flint said:
"People are using the public forum in a private way to solve their problems. Real estate is very personal and people will tell the most heart-breaking stories. 'I just got divorced and I'm losing my house.' The community is very benevolent."
To be sure, many of the people posting answers are real estate agents who are looking for business, as pointed out in a cynical but probably all-too-accurate post by Barry Cunningham of Real Estate Radio USA at The BloodhoundBlog here. In fact, Flint himself told me that one agent claims to have generated $100,000 in sales commissions off of contacts made through his postings on Trulia Voices.
Nonetheless, I see a lot of sincere advice being given at Trulia Voices, by agents and non-agents alike. You can find a more supportive take on Trulia Voices over at Trulia's own blog, here.
To all the benevolent people who have given good advice to others in need at Hot Property and elsewhere: Thank you.
Builders have been heavily discounting prices hoping to lure buyers back to the market. Prices for brand-new construction in some communities are very tempting and even comparable to bank-owned foreclosures, which sell in “as is” condition.
The problem for builders is that many buyers these days feel that a bargain in real estate is a moving target as prices continue to fall. Some builders, such as Shea Homes and Reno-based Pacific West Companies, are addressing the issue by offering price guarantees of up to three years, the San Jose Mercury News reported. That means if a developer drops the price for a home like yours before the last home in your subdivision is built, you can collect a refund for the difference.
Residents in the Thornton Grove Estates in Hamilton Township, Ohio might have benefited from such a guarantee. Some Thorton Grove residents recently complained to reporters at WCPO-9 News that new homes in the development are selling for about 20% less than they paid a few years ago.
"To take a $60,000 hit on a house that I bought three-years ago – it just isn't right," resident Kevin Bardsley told the television station.
You bought at the peak of the market. You put next to nothing down. (Maybe you even took out one of those 105% LTV loans to cover closing costs.) Now prices are falling, falling, falling, and you are underwater on your mortgage. Deep underwater, where the strange sea creatures dwell.
If it's any comfort, you are not alone. Here's what Zillow.com, the real estate website, says today:
"Of homeowners nationwide who purchased when U.S. home values peaked in 2006, one out of every two (51.6%) now owes more on their mortgage than their home is currently worth."
You're in better shape if you bought before or after the 2006 peak in prices. Here's the percentage of homes that are underwater on their mortgages based on when they were bought, according to Zillow:
2003 7% 2004 16% 2005 42% 2006 52% 2007 45% Las Vegas may look dry, but from the point of view of homeowners, it's deep underwater. Zillow says that buyers in 2006 posted a median downpayment of just 2%, and since then, home values have fallen 25 percent year-over-year, so 89.9% of homeowners now owe more than their home is worth.
Stockton, Calif., is worse: 95.8%. No wonder it's known (unofficially of course) as the Foreclosure Capital of the U.S.A.
Check out what these other blogs are saying about the Zillow report: Housing Prices-Housing Bubble, Zillow's in-house blog, and the blog at Active Rain by Zillow exec Spencer Rascoff.