Thursday, August 21, 2008
Why houses might go to foreclosure
North Bethesda is holding up reasonably well, considering the general market and media attention on the national real estate scene. It is true that, in my 25+ years as a real estate professional, I have never seen such a rate of foreclosures before, the fact remains that the current price rollback is not worse than the percentages we saw in the mid-1990s. My take on the foreclosure situation is as follows: In the lower price ranges, many people struggled to buy their first homes in the past 5-10 years, often combining several incomes from various extended family members to qualify for a loan. I have seen some of them badly used by corrupt loan officers, who placed marginal buyers in loans that were not explained to them and that would be impossible to maintain; typically, the disreputable lender would promise a low interest rate, not revealing that the loan terms would change dramatically in a few years and the payment would jump. Compounding the problem would be if the borrower's first language is not English and they were unable to understand the complicated documents they were told to sign. They might trust a lender who was only trying to get the largest fee. Another scenario would be the marginal buyer who had great credit and worked for years to afford a first home, then lose a job or get sick. There is no help for this situation, and the house can go to foreclosure. Those who owned their homes for a long time and had built significant equity from appreciation sometimes have to foreclose if they have been continually refinancing and taking the equity out of the house. Someone may have paid $200,000 for their house, but refinanced it to $600,000 when the market was high and it could appraise for a little more than that amount. There is no room for error, and when the prices dropped back so that the house might be worth $550,000, there is now a bigger loan out on the house than its value. In this case, it is not the fault of the appraiser, who placed a market value on the house based on its actual value at the time of the appraisal. These scenarios are new with this recent market, which explains the foreclosure rate rising in an area that historically had very, very few foreclosures. Be aware that the figures you see in the media can be misleading; if an area had 10 foreclosures a few years ago, and today there are 20, that will be reported as a "doubling" of the rate. This represents a very small percentage of property sales for this area, which continues to be in some demand due to its proximity to transportation and other amenities.