Do Toxic Loans Lead To Foreclosure?

From RealtyTimes:

Foreclosure Numbers at New Highs: Are Toxic Loans To Blame?

You have to wonder: Are we seeing more foreclosures than last year as toxic mortgages mature? These are “nontraditional loans,” a sterile description for mortgages with ridiculously low monthly costs at first (but higher costs later) as well as mortgages that feature limited documentation and overly-large initial loan balances.

We asked Rick Sharga, Realty Trac’s vice president of marketing, about the impact of toxic loans on the rising number of foreclosures and here’s what he had to say:

Question: Are toxic loans linked to the rise of foreclosures?

Answer: While we haven’t seen any report that definitively links the two, it’s logical to surmise that higher risk loans will default at a higher rate than more traditional loans. And the fact that a larger percentage of home loans fall into the high risk category than at any time in recent memory makes the possibility of a spike in foreclosures more likely.

Question: Have toxic loans begun to impact the marketplace?

Answer: It’s hard to assign the increase in the number of properties in default and foreclosure specifically to high risk loans, but they’re almost certainly a contributing factor. As large numbers of ARMs reset this year and next — we’ve seen numbers as high as $300 million in loans this year and $1 billion in 2007 resetting — we’ll be better able to gauge the impact on national foreclosure rates.

Question: Will we see a further increase in foreclosure levels?

Answer: We anticipate that foreclosures will increase throughout 2006 for several reasons.

First, the number of properties in foreclosure has been below historic averages for several years, and the market appears to be moving back toward more “normal” levels.

Second, increasing interest rates are driving up monthly payments for homeowners with ARMs, and will significantly increase monthly payments for people with 3/1 or 5/1 ARMs due to reset.

Third, house values appear to be cooling off, which gives homeowners less equity to leverage in the event that they find themselves in a financial bind — and limits the opportunity to sell a property at a profit for homeowners in default.

Question: Any general industry comments?

Answer: One of the trends we’re following is the number of properties that actually end up becoming REOs (bank repossessions). Over the past year, even as the general numbers of properties entering foreclosures has increased, the number of homes that actually end up as REOs has consistently stayed below 20 percent of the inventory. That relatively low number suggests that the market has been strong enough to allow owners to either re-finance, work out new terms with lenders, or sell the properties before they’re foreclosed on. It’s a statistic we’ll be watching closely, as we believe that a spike in the percentage would be a red flag.

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32 Responses to Do Toxic Loans Lead To Foreclosure?

  1. Metroplexual says:

    Chickens will come home to roost. Lax industry oversight and the need to keep this bubble growing to feed a bankrupt economy so Gspan looks good.

    I think the CPI is understating inflation. That said, these FB’s are getting hit with high gas prices a higher cost of living and add to that the adjustments. It is a perfect storm.

    So are toxic loans going to lead to REO’s? Of course. How many? Alot! I think this may rival the RTC of the early nineties in terms of impact.

  2. Wall Street Journal article. Read Home builder sentiment section.

    Five Indicators Give Early Clues, To the Direction of the Economy

    Home-builder sentiment

    The National Association of Home Builders/Wells Fargo monthly housing-market index gauges builders’ attitudes about the climate for new-home sales, an indicator of what lies ahead in the home-construction business, which has been giving economic growth a significant boost in recent years.

    NAHB readings above 50 mean the outlook is positive, and below 50 suggest times are tough. The index topped at 72 in June 2005, accurately predicting the peak in new-home sales the following month, and has declined steadily to 50. That is the lowest level in a decade, except for a brief period after the 9/11 attacks. David Seiders, the builders’ chief economist, expects the index to decline further but to remain above 40.

    It took a few months, but housing construction now appears to be following the downward arc of declining sales. Along with rising oil prices and interest rates, a severe housing slowdown remains one of the major risks to U.S. economic growth this year.

  3. UnRealtor says:

    Can the federal government mandate loan requirements, or can they simply ‘suggest’ guidelines?

    Seems to me if the federal government is going to insure banks against failure, they should be able to dictate how banks dole out loans.

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  6. I can’t say I disagree.

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