More than 1.1 million homeowners
will lose their homes to foreclosures by 2014 because
they can't afford the rising payments on their
adjustable-rate mortgages, a researcher reports.
Whether you think that's a big deal depends on your
"This is not going to break the economy.
It's better understood as a part of the business cycle," says Chris Cagan,
the mathematician who wrote the foreclosures forecast. That's the big-picture,
or macroeconomic, view.
The up-close, or microeconomic, perspective
is more ominous: "The trouble is that it doesn't affect everybody equally,"
Cagan says. "Its impact will tend to fall on the subset of borrowers, lenders
and investors who are most exposed."
billion in foreclosures?
In other words, the biggest losers will be homeowners
who lose their houses and lenders and investors
who fronted them the money. Cagan, a researcher
for First American CoreLogic, says the net losses
from these foreclosures will total about $100
billion over the next six or seven years. Depending
on whether house prices go up or down in the meantime,
the financial impact could be lighter or heavier
than that, he says.
says the problem stems from "the double whammy of reset and no equity."
There's a lot of meaning stuffed into that sentence.
Let's unpack it:
- Reset refers to the rising rate on an adjustable-rate mortgage,
or ARM. In most cases, the introductory rate
on an ARM can rise a maximum of 6 percentage
points. That means someone who gets an ARM with
a starting rate of 6 percent could end up with
a rate of 12 percent someday.
- No equity refers to the squeeze
borrowers find themselves in when they owe more
than the house is worth (being "upside
down" on the house). Cagan expects this
to happen to millions of homeowners. When they
owe more than the house is worth, but can no
longer afford the payments after ARM reset,
they won't be able to refinance. The most likely
outcome is foreclosures.
Cagan makes his prediction of 1.1 million foreclosures over the next six or seven
years, he's talking only about people caught in the vise between rising ARM rates
and declining home equity. These reset-related foreclosures will be in addition
to millions of foreclosures resulting from the usual reasons: job loss, divorce,
death, illness and fraud.
People become upside down on their houses in two
ways: The house loses value, or the loan balance
rises, or both.
|Property values in 20 markets
| Property values are falling overall in the United States, but the change is anything but evenly spread.
|This interactive map shows changes in house prices in 20 large markets in 2006-2007, and in recent months.
|Click to enlarge.
Houses are losing
value in some markets. The S&P/Case-Shiller
home price index reports that
the average house in Detroit lost
a whopping 11 percent of its value
in the 12 months ending in June.
Over the same period, houses lost
3.6 percent of their value in
Cleveland, 7 percent in the District
of Columbia, 3.7 percent in Boston,
and also dropped in Denver,
Las Vegas, Los Angeles, Minneapolis,
New York, Phoenix, San Diego,
San Francisco and Tampa, Fla.
In the nation's 20 biggest metro
areas, house values fell an average
of 2.2 percent.