Given all the political posturing in Washington over whether we should have a federal bailout or lifelife for subprime borrowers (some advocacy groups are lobbying for at least a six-month moratorium on foreclosures), Christopher Cagan, director of research at First American CoreLogic, has put a figure to the cost: $122 billion. That’s because, by his estimates, 1.1 million homeowners will be forced into foreclosure over the next six years. Here’s a link to a copy of his study (registration required, and warning: Study is 188 pages and a 3 MB download) and a story about his conclusions. (Interestingly, Yahoo has a new feature that allows you to enter a zip code and see foreclosures in your community, although you have to pay for the exact street addresses. Click on this link, then click on “Foreclosure Center.”)
Importantly, Cagan notes that this isn’t enough to sink the economy or mortgage markets. The foreclosures will represent roughly 1% of total lending. So why a bailout? I don’t see the rationale. Proponents of a bailout say it’s necessary to keep millions of people from losing their houses. I’m sure there are a number of borrowers who suffered unexpected hardship — the loss of a job, or death of a spouse — that imperils their ability to keep their house and they will suffer significant financial losses. My sense, however, is that many of these individuals who have made serious equity at stake — they put down a big downpayment — will do everything in their power to keep their homes. They’ll cash out their 401(k)s, sell their cars and walk, and wear sackcloth if that enables them to preserve their nest egg.
It’s also my sense that a number of the foreclosures are going to hit marginal buyers who got one of the millions of low-doc, no-doc, no-money-down mortgage written in recent years and didn’t have much skin in the game — a safe assumption given the number of 95%, 100% and 125% mortgages that were written in recent years. In those instances, who’s being bailed out? The homeowners who lose their homes without having made a downpayment aren’t losing any money; it’s the lenders who take the hit, and I don’t see any rationale for making Goldman Sachs, Bear Stearns whole, nor the investors who bought the mortgage-backed securities. And I certainly don’t see the rationale for saving the subprime lenders who made the loans. And I worry that imposing a federally mandated moratorium on foreclosures could have unintended consequences. Most lenders will be willing to provide some forebearance, since the last thing they want to do is take back a home on which they wrote a mortgage.
Yeah, I know there are many instances where individuals may have been duped by the terms of the loan — an option ARM that resets higher, includes $10,000 in dubious closing costs. But no one holds a gun to anyone’s head and makes them take out a mortgage. If I’m missing something, feel free to take the other side of the argument.
UPDATE: Just stumbled across this commentary on bailouts at Mish’s Global Economic Trend Analysis. Good read…
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.