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Foreclosures help housing market find a bottom

Foreclosures help housing market find a bottom

Home sales are booming once again in Prince William County, Virginia, an area hit hard by the housing bust. Foreclosures are responsible.
The same is true in counties across Southern California and inland areas east of San Francisco Bay. Sales in Southern California were up two-thirds from a year earlier, the largest increase in at least two decades.
It's all part of a nasty adjustment in the wake of the bursting of the housing bubble. The federal government is trying to find a way to mitigate the impact on families losing their homes, a difficult task because many of them can't afford their mortgages and, in some cases, never could.
While politicians look for a solution, market forces are generating their own.
Many homeowners who were counting on appreciation to create equity, letting them refinance into cheaper mortgages, got stuck once housing prices fell. Defaults and then foreclosures shot up, sending prices even lower.
The assumption that the wave of foreclosures is going to keep driving prices down is wrong. The big jump in sales suggests that prices may have hit bottom already in some areas. There are even tales of multiple offers on foreclosed properties, with buyers paying more than the asking price.
In Prince William County, more than 1,100 homes were sold last month, the most ever in September, according to the Northern Virginia Association of Realtors. The county of 360,000 is the second-most populous in the state and the jurisdiction hardest hit by the popping of the bubble.
Earlier this decade, home sales, construction and prices all soared as the availability of land, jobs and proximity to the nation's capital attracted 80,000 new residents over a six- year period. Too many of the new homes were sold to owners who couldn't afford them.
The median sales price of single-family detached homes plunged from US$405,000 a year ago to US$239,000 last month. The price decline has attracted families who plan to live in the houses and investors who can rent the properties for more than enough to cover mortgage payments.
In Riverside County, California, 4,551 homes were sold last month, more than double the sales a year earlier, according to MDA DataQuick. More than two-thirds were foreclosed properties.
This is a harsh process. Home values are down. Families have been displaced and neighborhoods disrupted. Vacant houses have fallen into disrepair.
Excesses absorbed
On the other hand, the excesses of the bubble years are being absorbed. Could this be accomplished with less pain and loss? Could the housing market in Prince William and Riverside counties - and San Diego and Las Vegas and Phoenix and Miami and Tampa, Florida - be stabilized in some other way?
I think the answer is no. Lenders are modifying some mortgages to prevent defaults and keep loans on their books. But because each mortgage-and-borrower pairing is different, there's no one-size-fits-all solution.
The only real fix is for prices to fall enough to attract buyers, and for better or worse, foreclosures are making that happen. Nevertheless, politicians want the government to do more to avert this process.
Democratic presidential candidate Barack Obama has proposed a 90-day moratorium on foreclosures and a change in bankruptcy law so that judges may reduce the value of a mortgage and set new terms.
His Republican opponent, John McCain, wants the government to spend US$300 billion buying mortgages from lenders at their full value and replace them with more affordable loans.
Yesterday, Sheila Bair, chairman of the Federal Deposit Insurance Corp., urged the use of federal loan guarantees to encourage lenders to modify mortgages. Yet the FDIC's experience with modifying mortgages at IndyMac Bancorp., which the agency seized in July, suggests this isn't a cure-all.
Bair told the Senate Banking Committee that out of 712,000 mortgages serviced by the Pasadena, California-based company, more than 60,000 were 60 days or more past due, in bankruptcy or foreclosure. About 40,000 of them potentially were eligible for modification on terms that would let owners stay in their homes and protect the value of the loan for the bank.
"If a borrower has no job, or other income, we can't help," said Evan Wagner, an IndyMac spokesman. Nor is the bank accepting offers from investors to pay off a loan at a big discount. "We're not erasing principal," he said.
About 15,000 of the 40,000 owners have been offered a modification. More than 3,500 have accepted the terms, which cut monthly payments by an average of more than US$380, Bair said.
Those are impressive results. Still, only about a fourth of the delinquent borrowers have so far been deemed eligible for better terms, and only about 6 percent have accepted an offer.
The deals help the borrowers and the lender and are well worth the effort in terms of the social and economic benefits. Yet the share of troubled loans being resolved just isn't enough to stabilize prices and markets. At best it helps at the margin.
The market is doing the rest.


Updated : 2021-01-25 23:27 GMT+08:00