The Third Wave Foreclosure Crisis
Foreclosures haven’t abated; if anything, they continue to pick up steam. They vary significantly by region - hotspots like Phoenix and Detroit are facing true epidemics. Other locations - like parts of NYC, for example - seem to be mostly bypassing the worst of things.
Yet now we’re facing what some economists are calling the third wave of the foreclosure crisis. This stage has the potential to further spiral things out of control. The NYTimes describes these three stages:
- An initial spike in the foreclosure rate due to speculators abandoning property, largely because of declining real estate values.
- The second spike came when a significant number of mortgage holders had their monthly payments reset as their teaser rates expired. This wouldn’t have mattered if prices had kept climbing - these individuals could simply have refinanced yet again. But with declining values, they were stuck with an unaffordable higher payment.
- The third wave, which some economist think could be even worse than the first two, is when homeowners with so-called ‘prime loans’ - that is, a normal loan to homeowners with decent credit histories - default on their mortgages due to job losses.
The crisis has climbed it’s way from speculators to sub-prime borrowers to prime borrows, which far outnumber the first two categories.
This is the perfect storm: job losses continue to intensify in virtually every state, meaning the expected income of these prime borrowers suddenly becomes unpredictable. Without a significant safety net (or emergency fund, the building of which is a fundamental personal finance lessons), a job loss means a near total loss of income. A missed mortgage payment, then, is not far behind. According to Economy.com, up to “60 percent of the mortgage defaults this year will be set off primarily by unemployment.”
The silver lining, we hope, is in mortgage modifications and a pickup of employment. But right now, neither of those are looking too promising.
I fear my folks will be in this “third wave.” They had excellent credit, but 35% down on their home, and now are sitting down and trying to analyze how long they will be able to keep their home. It’s sad to watch people who made good decisions stripped of their assets and livelihood due to the poor decisions of others.
Mrs. Modern Tightwad
8 Jun 09 at 3:04 pm