Foreclosure forecast: Few bright spots

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There’s been good news and bad news on the national foreclosure scene: The good news is the number of foreclosure notices — 223,651 — in February 2008 went down 4 percent from a month earlier. The bad news is those same filings represent a 60 percent jump from the filings for the month of February 2007.

By now, everyone knows there is a foreclosure crisis in this country. How bad is it, really? It depends on the context. Viewing the entire country, relatively few Americans — approximately two-tenths of 1 percent — are in foreclosure. That’s because more than half of all Americans don’t have mortgages — mostly renters, people who paid cash and longtime homeowners who have already paid off their homes.

However, when you zero in on just the homeowners who have mortgages, the picture gets more troubling. The really bad news? Almost everyone agrees the worst is yet to come.

How bad is it?

The stark reality is that in some parts of the country, foreclosure rates were higher than home sales.

Figures compiled by the Mortgage Bankers Association, or MBA, for the National Delinquency Survey sum up the grim situation: For the third quarter of 2007, the most recent MBA survey figures available, the total delinquency rate is the highest in the MBA survey since 1986. The rate of new foreclosure filings and the percent of loans in the process of foreclosure are also at the highest levels ever.

In general, the foreclosure picture is bad everywhere — but there’s bad, and then there’s really bad. In the West, things have hit particularly hard.

Consider this:
  • In Nevada, approximately one out of every 30 homes was involved in some type of foreclosure action in 2007, according to RealtyTrac figures.
  • Several metro areas of California have the dubious distinction of earning spots on the Top 10 list of foreclosures.
  • In Detroit, where massive layoffs have hit hard, foreclosure and unemployment go hand-in-hand: People who lose their jobs are much more likely to end up losing their homes. Not surprisingly, in many cities, the foreclosure rate and unemployment rates are moving at similar levels.
Everyone feels the pain

Foreclosures are everyone’s problem, not just the unfortunate homeowners who get the official notices. Many foreclosure properties are in poor condition — neglected or perhaps abandoned altogether — which then affects the value of the entire neighborhood. Also affected by the foreclosure crisis are homebuyers or potential homebuyers with solid income and decent credit, who often find a loan much tougher to obtain. In a January survey conducted by the Federal Reserve Board, around 55 percent of senior loan officers said they had tightened their lending standards on prime mortgages given to borrowers considered to have a low risk of defaulting.

The crisis also affects home sellers who are not in foreclosure. The bargain prices of many foreclosure properties drag down prices in the neighborhood and surrounding areas while making it difficult for all sellers to compete. The result is more lowering of prices and homes on the market for much longer periods.

Any good news?

It is tough to find any good news in the foreclosure picture. Small bright spots would be the temporary short-term relief offered to some distressed homeowners through state legislation and voluntary programs announced by the federal government, such as a pair of relief programs in Ohio that offer low-interest loans to homeowners at risk of foreclosure and a recently launched Maryland program offering loans of up to $15,000 to low- and middle-income distressed homeowners.

Generally, though, these programs will only be able to help a small percentage of the distressed homeowners in their areas.

In the long term, tightened lending standards have greatly reduced loans to high-risk buyers, so foreclosure rates should eventually level off. But most experts believe there are at least another few rough months ahead. The latest MBA projections anticipate home sales will bottom out in the third quarter of 2008, and residential home starts will be down 18 percent this year as compared to 2007. As late as spring and summer 2007, some lenders were still freely doling out credit to borrowers with shaky credit. Since many of those loans featured ARMs that have not yet reset — and may not do so for another year or two — their impact may not be felt for some time.

Is Uncle Sam doing enough?

Is the federal government doing enough to help distressed homeowners? Is it obligated to do anything at all? It depends who you ask.

The federal government’s latest move is Project Lifeline. It’s a voluntary program, but six of the nation’s largest mortgage lenders are already on board. It is essentially an outreach program targeting homeowners in serious risk of losing their homes. Project Lifeline provides a 30-day grace period (during which a foreclosure sale would be put on hold) to borrowers who reply to the letter and show a willingness to try to resolve the situation.

The main goal of Project Lifeline is to get homeowners to take action by contacting their lenders to discuss options, as opposed to the common strategy of living in denial, dodging the lender’s letters and calls, and hoping it will all just go away.

Bobbi Dempsey is the co-author of “The Complete Idiot’s Guide to Buying Foreclosures.”