Foreclosures Resulting From Falling Housing Market

December 5th, 2007

According to the Federal Reserve Bank of Boston the main reason behind the rise of foreclosure numbers is not the mortgage sector but the slumping of the real estate market. This view is in contradiction to the general opinion that unaffordable loans are at the root of the debacle. In support of this new angle the economic reverse gear of 2001 is cited, when sub-prime lending was common, people fell behind in payments and yet foreclosures did not dominate the scene. This was because the price of houses continued to rise. The houses were sold off and loans repaid. The research added that during that time borrowers struggling with payments somehow clung on in the hope that prices would rise further and they would be able to make some profit. Today the scene is different. With prices falling the borrowers have no incentive to try and make ends meet. Rather if the mercury dipped further then the price of the house would not cover even the loaned amount. Thus it is housing that is the deciding factor.

This report will take the wind out of the sails of all the efforts being made by local and federal officials. Henry Paulson is trying to make effective a deal to delay the hike in ARM’s. In Massachusetts schemes have started enabling borrowers to modify loans. The plans are not taking off with a zoom largely because many are unable to qualify for the minimum conditions.

These steps do not interest those who are concerned with the falling real estate market. There is this opinion gaining ground that it is this factor that will tell on the number of foreclosures. Boston Fed president Rosengran placed this view during a speech. However he endorsed the efforts of the government to help the foreclosure victims.

Sub-prime borrowers are six times more likely to slip into foreclosure than the traditional. With interests ready to reset for higher notches foreclosures will sharply increase. If the house price is steady then the borrowers can move into another category of loan smoothly. The Federal report found that New England residents are suitable candidates for loan modification because they have good credit and their houses are worth more than the loaned amount.

Of late the number of sub-prime lenders have diminished. 8 out of 10 companies issuing such loans have stopped doing so.