Foreclosures and the effects of the subprime market
by Richard R. Bode
How did we ever manage to get into the current real estate mess? Blame has been aimed at mortgage bankers, Wall Street, brokers, loan officers, Realtors, the Fed, legislators at the federal and state levels – there is more than enough blame to go around. We can worry about pointing fingers later, once we've found our way out of the quagmire.
When did we lose our way and how deep is the swamp we find ourselves in?
The market started its downward turn not in 2007, but in the middle of 2005.
Research by a First American Corporation subsidiary shows that by 2006, 10 percent of new real estate borrowers had no equity (or were actually "under water") when their loans went on the books.
The same study found that a third of all borrowers nationwide in 2006 had less than 20 percent equity.
Between the fourth quarter of 2006 and the fourth quarter of 2007, homeowners lost $387.5 billion in net equity holdings, due mainly to property devaluation in major markets across the country.
In April 2008, foreclosures in California were reported to be up over 350 percent over prior year totals.
I’ve always been told out of chaos comes order. We all have experienced the chaos; now it is time to put order back into the financial markets. We cannot expect a bail-out from the federal government. The "buck" stops with lenders, who have to make the changes needed to restore order.
Many lenders once active in the subprime market are either out of business or have changed their ways by offering the more conservative loan products. Underwriting has tightened up, perhaps almost too tight with lenders scared to lend money even to the A plus borrower. The days of interest only, no down payment, no income qualifying loans that got us into this problem are over.
Curtailing ludicrous lending is a step in the right direction, but we still must adequately deal with the sub prime aftermath. Failure to effectively do so may bring insolvency to our financial institutions. We must take control of our own destinies as we deal with the problem loans in our portfolios today, to mitigate losses.
Richard R. Bode is a veteran of over 26 years in banking, with extensive experience in lending, including residential mortgage and construction loans, commercial land acquisition, tract development and construction financing, loss mitigation, quality assurance and training. He and Linda D. Bode are the co-authors of Loss Mitigation – Short Sales, Financial Assistance, Bankruptcy, Foreclosure, available in the Banker Store.
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