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Foreclosure Math: 4 + 3 = 1 Big Mess

Posted by: Peter Coy on June 14, 2007

In foreclosure mathematics, 4 plus 3 equals 1, as in one big mess. At least that’s the way it seemed at today’s conference call for journalists by the Mortgage Bankers Association. addition.jpg

Four is the number of big states—California, Florida, Nevada, and Arizona—where the share of mortgage loans entering the foreclosure process leaped in the first quarter of 2007. The spate of actions in those four states caused the national rate of foreclosure starts to rise to 0.58% seasonally adjusted, breaking the record set in the previous quarter. Without them, the foreclosure start rate wouldn’t have set a record, the bankers said.

Three is the number of states—Ohio, Michigan, and Indiana—with an exceptionally large share of loans already in some stage of the foreclosure process. While they account for just under 9% of the nation’s overall mortgage loans, they account for about 20% of the loans that are in foreclosure. Without them, the share of loans in foreclosure nationwide would have been below the average of the last 10 years (1.12% vs. a 10-year average of 1.19%), the bankers said.

The mortgage bankers’ point seems to be that mortgage problems are highly concentrated and not a national crisis.

Of course, excluding those seven states from the Union may be an easy mathematical exercise but doesn’t have much bearing on real life. The pain they’re experiencing is real even if it isn’t equally shared in the rest of the country.

(Footnote: The Mortgage Bankers Association quarterly numbers are less current, but more accurate, than the monthly estimates put out by RealtyTrac, which Chris Palmeri wrote about a couple days ago.)

Reader Comments


June 14, 2007 2:38 PM

I hear a few different things, one that the real estate industry has hit bottom and that the market will begin to rise, and then two, that homes prices are still dropping. Which is true. I guess it depends more on the area. Supply is high and now more foreclosures on the block. What's your advice, hold steady and wait to sell in a few years? If buying, it's a gold mine I guess?


June 14, 2007 11:37 PM

Numbers, numbers, numbers, but not the whole story. If one was to look at the now or foreclosure rate they might get a little weary. For the real story look at the whole picture. A loan of any type has a high risk period, the first 3 to 5 years. Now ask yourself when were there record sales, 2003 is when it started here in Florida. Record sales would equal record loans. Now that we are in the fourth year from a record sale and loans year, it is only natural that we have record foreclosures. Now that you can see the whole picture, use this information to negotiate the best price and buy. People are scared and there are great deals out there. Keep a cool head and you'll come out on top.

V V Pointer

June 15, 2007 6:34 AM

Those four plus three states are only "regions" of a large country, but there 43 other regions where prices have dropped.

That kind of trend doesn't change direction quickly: Short real estate.

Cuyler Salyer

June 15, 2007 8:21 AM

Too late to Sell, unless you have to;

Actually RE Sales and Prices are slipping down an exceptionally slipery steep slope. Prices have only begun to tumble. The RE Bubble created a Parabolic Curve for RE Activity. The only way
down from such a curve as opposed to a Bell Curve
is almost straight down.

Go to and scroll to the
bottom of the long page. You will wee a "Chart of
the Week", by the Chartist, I believe. Double click on that and you will see were RE has progressed along the curve. What it shows is.

If you want to sale your house, it is currently ownly worth what prices for comparable properties
sold for in 2003. Prices over the next 3-4 years will revert to where they were in 2000. So, if you are thinking of selling, you had best price
your property to this curve rather than the "fluff" that the ignorant RE Sales people pump you with to get your listing.

Actually markets always over correct on the way down. So expect at the bottom 2010-2012 for RE to be worth less than what is was worth in 2000.

Mr. Salyer

easy enjoy

June 15, 2007 8:31 AM

this is haven: no hard work,just enjoy thanks to easy credit,only pay1% of debt to keep good credit but noo borrow and no pay,no need to anticipate repayment is it haven? where could you get that? bad credit,stated income to buy houses unbelievable,never intended to pay back when bought becoz 1% for a good credit and donot pay it !!!!

John M

June 15, 2007 8:34 AM

I've noticed a number of stories today spinning the "handful of states" argument against widespread distress in the country. This trick of suggesting a "core foreclosure rate" might even work for a while.

john jarvi

June 15, 2007 9:20 AM

And all this before the recent interest rate jump.
Of course, interest rates will have to rise furthur to attract money to US bonds, and to finance the black hole called Iraq. Much more pain ahead.


June 15, 2007 9:34 AM

Mortages and the high cost of selling a home tend to create a ratchet effect with the price of an existing home. When housing goes soft, people just don't move unless they have too. As long as the job market doesn't melt in your area, you won't see a large drop in prices.

Expect that housing will mostly remain flat for the next few years instead of rising with wages. In other words, your increase in wages and savings by renting should increase your purchase power over time. As a buyer, you'll also have a lot more choices as inventory levels remain high.

If you decide to buy at "market prices" it will be best to look at new homes. Builders continue to build even in a bust and prices of lumber, land and labor have all fallen from 2006 levels. Builders will have more room to negotiate prices than existing home owners who are stuck with little equity and high real-estate fees.

Builders will lure buyers to new homes by offering higher end finish work and features compared to existing homes at the same prices. This will continue until inflation and demand force up the price to build a new home. At that point, the inventory of existing homes will clear and the real estate bust will be over.

If you can find a real-estate agent that's willing to work with you, there will be "deals" on the market. New homes or foreclosures that are selling 20-30% below the market as the weak hands are forced to liquidate.

Of course, don't buy anything if you don't believe you'll be in the home for 5 years.


June 15, 2007 9:43 AM

As a ex-Floridian who just left 2 weeks ago..the pain is very real for those experiencing it right now..with high property taxes(2% of the sale price a home. NOT a new home. If previous owner bought at 200K their property taxes were around $4K for the same person buying that home at $400K taxes around $8K.), insurance cost(mine was $7K with $56K deductible), low paying wages and lack of affordable housing Florida is in serious trouble. Many have predicted a recession for the state and all economic indicators seem to be supporting that. I believe that the numbers don't even begin to tell how bad the situation with housing is down there. Based on what we saw before we left I believe there is worse to come in terms of many small businesses in the economy cut back on employment to meet the growing demand of taxes and insurance and the lack of new people and companies moving into the state.


June 15, 2007 10:12 AM

Here in Georgia - the forclosure rate is high.
But it looks like it does not compare to Indiana, Florida and Ohio.

You can not have Americans addicted to SUV's(remember that little tax loophole - that pushed people run out and get a new SUV -- then the next year gas prices started spiraling out of control).
Then....they have addicted people to those credit cards ---Thinking that the minimum payment is okay to pay. IT"S NOT. There is no way you can refinance --- if all of your credit cards are maxed out- especially the ones with $300 limit. Lastly, most people don't know: when you have spent over 50% of the available credit line --- your credit score drops 50-80 points. There is no way that you can re-finance your loan - carrying heavy credit card debt.

Schahrzad Berkland

June 15, 2007 11:08 AM

This is the first national housing bubble, to my knowledge.

Even areas where prices have just been going up a steady 2-3% for decades, like Omaha, NE, have seen big price drops due to overbuilding. Prices in Omaha fell 5% last year, for the first time in a 30-year real estate veteran's career.

Prices will fall as long as we have a supply glut from overbuilding, foreclosures, and speculators trying to exit.

You are right when you note supply. Keep watching supply. Also watch demand. It is still falling.


June 15, 2007 11:26 AM

the worse part is for those home owners in
California who are not in foreclosure and
are stuck with big big mortgages for 30 yrs
(or more!). Short term, they are in
economic ruin.


June 15, 2007 12:02 PM

Sell now (preferrable 6 months ago) and rent. Keep renting until the market turns. Not when amateurs speculate it's turning, but when it's actually turning. It's going to be a while...


June 15, 2007 12:10 PM

Ummm, hello? This is being stated by the MORTGAGE BROKERS ASSOCIATION!!!!!!!!!!!!!!!!!

Could they possibly have a bias?


June 15, 2007 3:23 PM

Ask the borrower if they purchase a new car, ran up their credit cards and/or made late payments to drop their credit scores.

Sub Prime is a very good program, the lenders and realtors does not control the borrower spending habits.

Jimmy Bogroff

June 15, 2007 3:40 PM

This issue needs more perspective. Cross Reference this with data on appreciation and concentration of subprime loans, and I might start to consider the "selective excluision theory," if we're seeing the same states mentioned above. There's no way to ensure that this will continute to be contained to these states and these states alone. Some areas of our nation tend to lag behind others. Perhaps we are seeing the 10% of the iceberg viewable from the surface?

Of course, omitting your largest samples is also the quickest way to compromise data integrity.

Should we also try to make ourselves feel better by excluding all loans made at 100% of the home's value, or all Stated Income loans?

Avoidance of the data at hand is not the correct approach. I'm hoping for a more responsible and accountable analysis of the data next time around.

Now if we could just get Wall Street to take responsiblity along with the originators. Their willingness to loosen lending restrictions and to pay for ill-advised loans was as much of a contributing factor to this mess as the originator's willingess to originate any loan for profit (regardless of its merit).


June 15, 2007 10:05 PM

"A loan of any type has a high risk period, the first 3 to 5 years. Now ask yourself when were there record sales, 2003 is when it started here in Florida..."

You're claiming that today's foreclosures are 2003's loans. That's incorrect, they're mostly 2006 and 2005's loans. You might argue about loan volume in 2005, but 2006 has no such excuse. The fact of the matter is that people are walking away once they fall underwater on their loans. As prices continue to decline, this will only accelerate.

People have good reason to be scared. Heck, we're still watching the previews, the main attraction is yet to come.

David Banks

June 15, 2007 11:34 PM

This will not end till the echo boomers reach 35 years of age. What drove it were the baby boomers. What is busting it is baby busters. The peak age of first time buyers is 35. You usually prchase your largest home around 43. The baby boomers have basically left the building folks. We have a 15 year bust to contend with till the echo boomers start buying homes. Coincidence that homes peaked in 2005 I think not. Sit back and enjoy the show it will either be a slow train wreck or a 747 into the ground with 13 years of stagnation to follow. Either way should be a great show.


June 16, 2007 8:26 AM

This is just the beginning. In Southern California, many people who already own a home cashed out and bought another (or more) property to flip. For those home owners who have good credit, they bought 2nd (or more) home with zero down (A-paper). Guess what? Now that they owe more than their property is worth, many of these people will just foreclose their property and walk away with a bad credit for a few years. And for those who went with option ARM (the majority of flippers use interest only or neg amort), their rate will reset around 2010 and you will see another wave of foreclosures.

Banks have recently (and finally) taken out zero down programs. Foreign US Bond investors like China are finding other ways to invest, indirectly causing the 10 year Bond yield to go up (which in turns, increase the 30yr mortgage rate). Like it or not, this housing downturn will be painful and long lasting. Price will go up a notch and then it will go down another 3 notches. It may take 10 years or more to hit bottom. For those prospective buyers, my advice would be to rent now while rent is still cheap compared to buying.

Casa Amigo

June 16, 2007 11:36 AM

CA homes are overpriced by 20%.


June 16, 2007 11:48 AM

Housing has always worked in cycles--were are headed for a downturn.

I remember my older sister having to withdrawl $45,000 out of savings back in the mid 1980's California defense sector bust to pay off a negative equity loan so she could sell the house. Back then people were so afraid of their credit status but today I don't think people will hesitate to just walk away from negative equity because there is always someone willing to lend you money despite your record.

More bad news for California housing market.

College graduate exodus threatens California

"For decades, college graduates flocked to California to make their fortunes in aerospace, computers and other high-tech jobs. But that modern gold rush is over, and that is the root of a multi-faceted problem that might haunt the California economy in decades to come.

With stratospheric housing prices creating an unprecedented outflow of college graduates, a prominent think tank says California faces a worrisome shortage in future decades: A lack of highly skilled workers to boost the state's quality of life."

When a state loses it's educated classes because home prices are so high then you know trouble is around the corner.


June 16, 2007 4:19 PM

Rust belt states still have more pain to feel in the years ahead. As former employees from the Big 3 use up their buyout amounts, they too will go into foreclosure, and I imagine that a lot of them had good credit ratings. Just wait and see things deteriorate.


June 16, 2007 10:45 PM

Educated middle class people with families are fleeing Palm Beach County, Florida if they can get out at even break even on their home. What's worse is that educated people have completely stopped moving here. It's the worst possible situation, low pay and skyrocketing cost of living. To live comfortably in a decent house in a safe neighborhood (few and far between) you would have to have a gross household income of $200k. That is living in an average home (3/2/2) in a gated community. Nobody makes that kind of money here so the county is losing all of its quality people. However, the population is not really decreasing in that 1000 illegal immigrants a day are moving here. It is making life unbearable. The main roads in West Palm Beach are starting to look like border towns in Mexico. You can not stop at a light and not see at least 20 loitering Mayans. If I were not stuck in my home, I too would be leaving skid marks on my way out of town.


June 16, 2007 10:46 PM

Real Estate is in a downward spiral with no immediate rebound. Your best bet is if you could sell then sell. My guess is it won't rebound until after 10 years. The war is not helping and our national debt is not helping. It all translates to less jobs and less money to go around.


June 16, 2007 11:41 PM

I think its just the beginning:


June 17, 2007 8:15 AM

These six states have a combined population of 90,000,000 - or one-third of the country.

However you spin it, that's a lot of pain.


June 17, 2007 10:54 AM

MJH says it best-- "The Main Attraction is yet to come"

I add--"Fasten your seatbelts, and don't forget the barf bag--This is going to be one gut-churning ride! Get your financial houses in order now if you can people and best of luck to all--


June 17, 2007 11:28 AM

Don't worry your government has a plan in place!

Yes, these goons in our government have the answer, any which fall into bankruptcy or are foreclosed on, you will have a job waiting for you with the government. That’s right, a government job!

You see the government and bankers have had a plan put in place a long time ago. Ever since the started making those ill-advised loans to keep the country fooled by propping up an already failing economy. (You remember; like when they added fast food workers to the manufacturing totals to prop up the manufacturing slump).

With the new bankruptcy laws, you will be held accountable for you loans, pasted and present. Forever; until you pay them off (as I understand, even if it takes you grand kids or their grand kids to pay it off, that debt will follow until paid off).

But wait, you’re in luck! There will be jobs to be had all around the country, just not very good paying jobs! As a matter of fact, in most case’s you will not get paid at all, you will just work and get fed just enough to live on (a great diet plan as well) and all your earnings will go to repay your loans, debts. And for those who don’t own, or have a job or no place to live. The government will be there to help you out as well. You won’t get paid; but you will get a little food and a bed for your effort.

Then as most will find out; there will be lots of jobs in the military, with new jobs opening all the time. Lots of new jobs, jobs for along time to come.

And if you cannot decide which jobs are right for you, well the government will and does have the right people in place to help you decide.


There are those beautiful work camps that Halliburton help built, some would call them concentration camps.

But hey, what’s the different, WORK CAMP or CONCENTRATION CAMP, at the end of the day, it's all the same.

Country new slogan;


June 17, 2007 11:53 AM

When it comes to the "BIG FOUR STATES" listed above, most was created by speculators who raised prices for those stupid enough to take a loan they could never afford. In most of this country, the idea of an average middle class house having a payment in excess of $6000. a month is beyond sane thinking. You can still buy a nice house in most of the country for $200,000. If the truth were blurted out about how long and how far prices are going to drop, there would be no Real Estate market at all. In my opinion, California prices hit that "ridiculous" level in 2003 and then was extended for 3 more years by a fraudulent Mortgage Industry. The repo's of today are those from 2003 & 2004. Just wait 'till the other shoe drops. But remember, all along the way the Industry will be saying "we're almost bottomed out!" and national numbers will always wash out the truth in the 'Big Four' states.


June 17, 2007 11:11 PM

As it was said above in a post... "you'll get deals when the weak hands start to fold". What the hell is that? The rich just keep on getting richer right? There is no middle class, Only poor and rich, Period. What has happened to the American dream? It's become a Forclosure and somebody's "good deal" right? An investment property to flip, or to rent to some poor fool who couldnt keep their home in today's coold cruel economy. Catch a clue, it's going to get worse.... and it's only a deal when it's not happening to you.

jose gomez

June 21, 2007 7:07 PM

AS for the person making the goverment look so bad and that they will never ever forgive your debt. Thats simply not true at least in florida you can file all your debts in bank ruptcy court one time in your life and they will all be discharged. And no one but the person who owes them is responsible. Also in florida even in debt a persons homestead is totally protected from all credtitors. Things are bad but know what your talking about.


June 24, 2007 3:03 PM

People make choices-----
While it is a bit disheartening to hear such sharky comments, investing should never be undertaken by those with limited knowledge and willful ignorance of the fundamentals--it dosen't take much to educate yourself, but so many people in the last few years, chose instead to put their heads in the sand, and follow the other lemmings off the proverbial cliff...

EVERYBODY who has ever bought a house KNOWS what they truly can and cannot afford, and personal responsibility must come into play at some point.

The golden rule with major investments has always been buy low, sell high -- and if you're really smart, buy only when there is blood running in the streets. Unfortunately, it looks like there will be plenty of that in the years ahead--

The moral of the story?? Don't hate on the smart people for making an educated, informed, responsible choice where the market is concerned.

Sunny Skies,

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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.

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